Net Present Value Calculation

I

ipxl

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I'm trying to understand the economics/costs of investing an additonal
12.5k Euro on a 20 year mortgage on a principal sum of around 250k.

I've asked about this in the House/Gardening forum and someone helpfully replied that I should look at the analysis based around NPV (Net present
value) and to basically discount all costs over the period of the investment to current costs.

Basically I am looking at trying to establish the payback time of a heat pump installation based upon it making savings of an average of 1500 Euro per year (compared to oil). I know that difference between oil & electricity is likely to increase but whether it will in relative terms is questionable and all depends on how ESB and whatever competition emerges diversify into non-fossel fuel based energy sources over the next 10-15yrs.

I did a fairly simplified analysis by looking at the additional interest payments I'd be making on X amount plus 12.5k over 20 yrs assuming an average variable rate of about 4.1% (which probably underestimates rates given that they are now creeping upwards again). It looked like I'd be shelling out 20-22k for the luxury of the heatpump and the payback time looks way longer than the alternative energy marketeers would have one believe.
It looked like 10-12 yrs minimum payback interval and that gets close
to the lifetime of some of the heatpumps critical components... which
starts to invalidate the payback period again!

Anyone willing to take a shot at trying to project the payback time
given the parameters I've given ?

I'll promise to share the Nobel Prize for Economics with you ;) !!

-ipxl
 
I'm not sure what exactly your trying to calculate - but using NPV I think would be overly complicated. What I'd do is caculate how many years it would take to break even while factoring in the interest rate (which effectively acts as a discounting rate - so maybe would be using NPV after all).

You have:
  • A Rate: say 4.1%
  • A saving/recurring payment (or Pmt): of 1500
  • A upfront cost (or Present Value or PV): of -12500 (the minus is important)
Sticking the lot into the NPER function of Excel or some other financial calculator, tells me that it will take you 10.3 years to break even.
 
darag said:
I'm not sure what exactly your trying to calculate - but using NPV I think would be overly complicated. What I'd do is caculate how many years it would take to break even while factoring in the interest rate (which effectively acts as a discounting rate - so maybe would be using NPV after all).

You have:
  • A Rate: say 4.1%
  • A saving/recurring payment (or Pmt): of 1500
  • A upfront cost (or Present Value or PV): of -12500 (the minus is important)
Sticking the lot into the NPER function of Excel or some other financial calculator, tells me that it will take you 10.3 years to break even.
Click to expand...

Interesting. Thanks Darag.

Maybe the 1500Euro I've given as the annual saving is possibly unrealistic.
I'm guessing that if oil prices and electricity prices rise then even if in percentage terms if the relative differences between oil & electricity rates
don't vary much compared to how they are presently the actual savings figure will inflate because 1500Euro would be a much less significant amount of money in real terms say 8-10 yrs from now.
However, I do believe 10 years is a reasonable guesstimate of where these investments might start to pay for themselves. What concerns me is that heat pumps have costly components to replace and if there was any significant point of failure in the heat pump system during the 10+ yrs then all bets would be off as the replacement/servicing costs would have reimposed another stretch into the payback interval.

Maybe I'm seeing a glass half empty rather than half full and I'm looking at this pessimistically. I just get annoyed when the heat pump and pellet boiler technical sales guys give an over simplistic analysis of the payback interval and I've heard figures of 6yrs being given which are clearly misleading.
 
extopia said:
There are lots on online NPV calculators. Here's one:

[broken link removed]
Click to expand...

Extopia - Quick question.
Thanks for the link. If I recall it was you (maybe on boards.ie or here) who gave me the advice about using NPV method to work out the payback on an investment where interest was applied.

I think I logged on late last night and I was sure you gave a worked example also and reckoned the payback was going to be in the 6-7 yr range based on my sample figures. When I logged in today your post just gave the link to the NPV online calculator. I was curious about that worked example. It seemed to suggest that the amount invested in real terms was less than the principle amount (12.5k) and I couldn't really work out why that could be the case.
 
Hi

Yes, I took that example down because it looked incorrect to me too, not sure why. Sorry. I'm not an expert in calculating NPV, but I do understand the principle. What kind of numbers did you end up with yourself?

However... couple of observations. Where did you get the 12.5k starting point? I installed a heat pump system but there's no way it was 12.5k MORE EXPENSIVE than an oil system - in fact the whole system was about that amount, including the underfloor pipes and radiators upstairs, which I would have needed anyway with an oil system. Are you sure this is the right number? I'd have to check my records but I believe my heat pump cost about 6k. Can't remember the cost of a comparable oil or gas boiler to be honest, but the "payback period" should be based on the difference in the cost of installing an entire oil sytem and an entire heat pump system.

Also in computing savings, factor in savings in the ability to use night rate electricity to run your heat pump.

Re NPV: if the net present value of your loan repayments on the heat pump costs (adjusted for the difference in cost over an oil or gas or solid fuel system) is less than the present value of savings over the life of the system, it's a good investment. You're right to factor in the life of the heat pump - it's essential in fact.
 
extopia said:
Hi

However... couple of observations. Where did you get the 12.5k starting point? I installed a heat pump system but there's no way it was 12.5k MORE EXPENSIVE than an oil system - in fact the whole system was about that amount, including the underfloor pipes and radiators upstairs, which I would have needed anyway with an oil system. Are you sure this is the right number? I'd have to check my records but I believe my heat pump cost about 6k. Can't remember the cost of a comparable oil or gas boiler to be honest, but the "payback period" should be based on the difference in the cost of installing an entire oil sytem and an entire heat pump system.
Click to expand...

I've two quotes from highly commended heat pump supplier/installers
and the one which I am considering most strongly is for a 16kW
heat pump with a borehole collector and I am including the cost of
drilling the borehole and subtracting the 6.5k SEI grant.
Heatpump + boring is almost 19k before grant subtracted.
I think the one thing I haven't adjusted for is the cost of an
oil boiler and associated flow/return controllers. I'd imagine
that's no more than 1-2k (I stand corrected on that).
My other heat pump quote is for a horizontal ground collector
but I need to add in the cost of excavation and fill and quite
possibly extra drainage channels or sand to be added to
improve the soil quality where the pipes are buried.
If you got a heatpump + collector for 6k Euro before the
SEI grant then you must have been doing very well.
The heat pump I am looking at is sized for a 2700sq ft
2 storey living space. I haven't included the cost of UFH
in that at all.

My 1500Euro savings per year is based upon some figures
I've seen from someone actually running a very efficient
heat pump and it includes night save rate (you need to
factor in the additional chare of night save facility standing
charge though also which offsets savings a little).

Lifetime of pumps is a big concern. There seems to be a lot
of talking up by the heat pump proponents that reliability
has improved leaps and bounds. However, many folks with
mechanical engineering backgrounds would argue that
compressors which have quite erratic workloads (re:Irish
climate) may have a shorter lifetime than the salesmen
might have one believe....
 
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