Is it justified to deduct interest and depreciation while calculating payback from an investment?

Question

How does one calculate financial payback for an investment in solar power? I think it should be:

yearly savings x growth in tariff - discounted savings - O & M costs

Now, should interest on investment and depreciation be deducted from annual savings too?

Thanks!

Answer 1

Payback is calculated as the amount of time it takes to recover your investment.

Interest does belong in the calculations because it is a real cost that you would not have if you did not purchase the equipment.

Depreciation is not an appropriate component of your analysis, as it does not involve an inflow or outflow of cash.

Best of success.