This topic describes the inputs on the Financial Parameters page for the Commercial financial model. For a general description of financial structures SAM can model, see Financial Models.
SAM displays results of the financial model in the cash flow.
Commercial Loan Parameters
Note. For the residential mortgage and commercial financial models, SAM deducts loan interest payments from state and federal income taxes. For the residential loan option, SAM does not deduct loan interest payments.
Debt Fraction
Percentage of the net capital cost to be borrowed. The net capital cost is the total installed cost from the Installation Costs page less any direct cash incentives on the Incentives page.
Loan Term
Number of years required to repay a loan. Note that this value is different than the analysis period.
Loan Rate
The annual nominal interest rate for the loan.
Principal Amount
The loan principal amount, or amount borrowed.
This is a calculated value that you cannot directly edit. To change the value, change either the value of the debt fraction or a cost on the Installation Costs page.
Principal Amount ($) = Total Installed Cost ($) × Debt Fraction (%)
Where Total Installed Cost is from the Installation Costs page.
WACC
SAM displays the WACC for projects with debt when you specify the debt size as a debt percent. It is shown for reference and not used in any calculations.
This is a calculated value that you cannot directly edit. To change its value, change one of the parameters in the following equations:
WACC = [ Nominal Discount Rate ÷ 100 × (1 - Debt Percent ÷ 100)
+ Debt Percent ÷ 100 × Loan Rate ÷ 100 × (1 - Effective Tax Rate ÷ 100 ) ] × 100
See the Nominal discount rate variable description for its equation. The effective tax rate is a single number that includes both the federal income tax rate and state income tax rate. SAM uses the effective tax rate for several calculations requiring a total income tax value:
Effective Tax Rate = [ Federal Tax Rate ÷ 100 × ( 1 - State Tax Rate ÷ 100 ) + State Tax Rate ÷ 100 ] × 100
Analysis Parameters
The analysis parameters specify the analysis period, inflation rate and discount rate.
Analysis Period
Number of years covered by the analysis. Typically equivalent to the project or investment life. The analysis period determines the number of years in the project cash flow.
Inflation Rate
Annual rate of change of costs, typically based on a price index, expressed as a percentage. SAM uses the inflation rate to calculate the value of costs in years two and later of the project cash flow based on Year One dollar values that you specify on the Operating Costs page, Financial Parameters page, Electricity Rates page, and Incentives page.
The default value of 2.5% is based on consumer price index data from the U.S. Department of Labor Bureau of Labor Statistics, and is the average of the annual average consumer price index between 1991 and 2012.
The inflation rate may be either a positive or negative value.
Real Discount Rate
A measure of the time value of money expressed as an annual percentage. SAM uses the real discount rate to calculate the present value (value in year one) of dollar amounts in the project cash flow over the analysis period and to calculate annualized costs.
SAM's financial model results are very sensitive to the real discount rate input. If you plan to compare metrics that depend on discount rate (NPV, PPA price, IRR, LCOE, etc.) to market values of those metrics, you should carefully choose the discount rate for your analysis. If you are comparing these metrics for different scenarios within SAM and use the same discount rate for each scenario, the value of the real discount rate input is less critical because you can evaluate the scenarios based on the relative values of the metrics, e.g., Scenario A with NPV =$1000 is worth more than Scenario B with NPV = $800.
SAM's default value of the real discount rate is based on a reasonable guess for renewable energy projects in the United States. Because discount rates are very subjective and project developers are typically reluctant to share information about discount rates, published documents on renewable energy finance typically do not include detailed information about discount rates.
Note. For projects with one of the PPA financial models, SAM includes both a discount rate and internal rate of return (IRR) in the analysis. For these projects, the discount rate represents the value of an alternative investment, and the IRR can represent a profit requirement or the risk associated with the project. For example, the IRR may be higher than the discount rate for a renewable energy project with higher risk than an alternative investment.
Nominal Discount Rate
SAM calculates the nominal discount based on the values of the real discount rate and the inflation rate:
Nominal Discount Rate = [ ( 1 + Real Discount Rate ÷ 100 ) × ( 1 + Inflation Rate ÷ 100 ) - 1 ] × 100
Note. Although the nominal discount rate is an input, SAM also reports its value in the results (see the Data Tables tab on the Results page) .
Tax and Insurance Rates
Federal and State Income Tax Rates
The annual federal and state income tax rate applies to taxable income and is used to calculate the project's tax benefits and liabilities.
You can specify either a single annual tax rate, or use the Edit Schedule window to specify a tax rate for each year. The latter option is useful for modeling a tax holiday where the tax rate for the first few years is zero.
For all projects, taxable income includes income from any incentives marked on the Incentives page as taxable.
For residential and commercial projects, SAM does not consider the value of electricity saved by the system to be taxable income. For commercial projects, because those savings represent the value of electricity purchases that would have been a tax-deductible operating expense to the commercial entity, SAM does reduce the project cash flow by the amount of federal and state income tax on the value of the electricity. In other words, with the renewable energy system in place, the commercial entity must pay tax on that portion of its income that it would have deducted as an operating expense.
For PPA projects, taxable income includes earnings before interest, taxes, depreciation and amortization (EBIDTA) and interest earned on reserve accounts. EBIDTA is revenue from electricity sales revenue (PPA revenue) less annual operation and maintenance, property tax, and insurance expenses.
Sales Tax
The sales tax is a one-time tax that SAM includes in the project's total installed cost. SAM calculates the sales tax amount by multiplying the sales tax rate on the Financial Parameters page by the rate you specify under Indirect Capital Costs and the Total Direct Cost on the Operating Costs page.
For tax purposes, because SAM includes the sales tax amount in the total installed cost, it treats sales tax as part of the cost of property. For projects with depreciation (Commercial and PPA financial models only), SAM includes the sales tax amount in the depreciable basis. See IRS Publication 551, Basis of Assets, for more details.
Some states and other jurisdictions offer a sales tax exemption for renewable energy projects. To model a sales tax exemption in SAM, reduce the sales tax percentage as appropriate. For example, for a 100% sales tax exemption, enter a sales tax rate of zero.
For projects with debt, because SAM includes the sales tax amount in the total installed cost, the sales tax influences the debt amount and debt interest payment. For projects where debt interest payments are deductible from federal and state income tax (all financial models except Residential with standard loan), SAM includes sales tax in the calculation of the deductions.
Insurance Rate (Annual)
SAM treats annual insurance payments as part of the annual operating costs. The insurance cost in year one of the project cash flow is the insurance rate multiplied by the total installed cost from the Operating Costs page. The first year cost is then increased by inflation in each subsequent year. For commercial and PPA projects, the insurance cost is a tax- deductible operating expense.
Property Tax
Property tax is an annual project expense that SAM includes under Operating Expenses in the cash flow.
SAM treats property tax as a tax-deductible operating expense for each year. In each year of the project cash flow, the property tax cost is the property tax rate multiplied by the assessed value for that year.
SAM determines the annual property tax payment by calculating an assessed value for each year in the cash flow, and applying the assessed percent to that value. The assessed value may decline from year to year at the rate you specify. The assessed percent and tax rate both remain constant from year to year.
For residential projects, the property tax amount is the only operating cost that can be deducted from state and federal income tax.
Assessed Percent
The assessed value of property subject to property taxes as a percentage of the system total installed cost specified on the Installation Costs page. SAM uses this value to calculate the assessed property value in year one of the project cash flow.
Assessed Value
The assessed property value in Year One of the project cash flow:
Assessed Value ($) = Assessed Percent (%) × Total Installed Cost ($)
Where Total Installed Cost is from the Installation Costs page.
Assessed Value Decline
The annual decline in the assessed property value. SAM uses this value to calculate the property assessed value in years two and later of the project cash flow. For an assessed value that does not decrease annually, specify a value of zero percent per year.
Property Tax
The annual property tax rate applies to the assessed value of the project in each year of the project cash flow.
Salvage Value
SAM considers the salvage value to be project income in the final year of the project cash flow, and calculates the value as a percentage of the total installed cost from the Operating Costs page.
For example, if you specify a 10% salvage value for a project with a 30-year analysis period, and total installed cost of $1 million, SAM includes income in Year 30 of $100,000 = $1,000,000 × 0.10.
For residential projects, the salvage value has no effect on federal and state income tax.
For commercial and PPA projects, the salvage value is treated as a source of pre-tax revenue in the final year of the analysis period, increasing the federal and state taxable income.
Net Salvage Value
The salvage value as a percentage of the project's total installed cost from the Operating Costs page.
End of Analysis Period Salvage Value
The salvage value dollar amount that will appear in final year of the project cash flow.
End of Analysis Period Salvage Value ($) = Net Salvage Value (%) × Total Installed Cost ($)
Where Total Installed Cost is from the Operating Costs page.
