The payback period is the time in years that it takes for cumulative annual savings to equal the cumulative annual costs. The simple payback period accounts for the value of electricity generated by the system, installation and operating costs, incentives, income taxes, and for commercial projects, depreciation. The discounted payback period also accounts for the time value of money by using cash flows discounted at the nominal discount rate from the Financial Parameters page.

The payback period works best for evaluating the economic viability of a project when all cash flows are regular and over the same number of years. It does not work well for projects with the features that may cause the payback period to suggest that the project is "paid off" before project costs are finished:

•Debt, because the debt payment period may be different from the analysis period (see the note below for a discussion).

•One-time or irregularly-timed costs such as equipment replacements or other investments that occur in a specific year that may fall after the payback year.

•Cash or tax incentives that change over the life of the project, such as income tax holidays or incentive payments over a few years.

The net present value (NPV) accounts for all costs and benefits of a project, regardless of when they occur during the project life, and is generally a better metric for evaluating a project's economic viability.

Notes.
 
SAM calculates the payback period for commercial and residential projects only.
 
A payback period of "NaN" (Not a Number) indicates that the payback period is greater than the analysis period. A negative payback period indicates that the sum of IBI and CBI incentives is greater than the project's net capital cost.
 
You can reduce the payback period by decreasing the installation cost, increasing cash incentives (IBI or CBI amounts), increasing tax savings, or decreasing operating expenses.

SAM's payback calculation is based on the descriptions of simple payback and discounted payback in Short W et al, 1995. Manual for the Economic Evaluation of Energy Efficiency and Renewable Energy Technologies. National Renewable Energy Laboratory. NREL/TP-462-5173. http://www.nrel.gov/docs/legosti/old/5173.pdf

You can download workbooks that replicate SAM's payback period calculation from the Financial Models page on the SAM website. For Windows versions of SAM, click Send to Excel with Equations from the Cash Flow tab of the Results page to generate an Excel workbook that replicates SAM's payback period calculation.

A note about payback period and debt.
 
SAM's payback period calculations do not include debt because of the ambiguity introduced if the payback period is less than the debt repayment period: In that case the payback period might suggest that the project is "paid off" before the owner's debt payments are complete. For example, if a project with a 25-year analysis period and 15-year debt period has a payback period of 12 years, the payback period suggests that the project has paid for itself in Year 12 even though debt payments continue for another three years.
 
For projects with debt financing, the loan parameters specified on the Financial Parameters page do not affect the payback period because:
 
1. As described below, the payback period depends on the project investment cost (sum of IBI and CBI minus total installed cost). The loan amount does not affect the project total installed cost or the value of IBI or CBI.
 
2. The Debt Interest Payment × Effective Tax Rate term in the cash flow equations (see below) effectively remove the tax on debt interest from the payback period calculation for Years One and later. As the cash flow equations for State and Federal income tax show, the tax on debt interest is included in the tax savings amounts. SAM subtracts the amount from the payback cash flow equation to remove the effect of debt from the payback period equation.

Cash Flow for Simple Payback Calculation

SAM uses the values from the cash flow described below to calculate the payback period. The payback period is the year when the cumulative sum of the annual savings is greater than the cumulative sum of annual payback cash flows.

For residential projects:

For commercial projects:

For the purposes of calculating the payback period, the cash flow (CF) in Year zero is the net capital cost, equal to the total installed cost less any investment-based incentive (IBI) and capacity-based incentive (CBI) amounts specified on the Incentives page. The installed cost is shown here as a positive number here for clarity, but in the cash flow the signs are reversed so that a negative number for the cash flow in Year 0 indicates a net outflow of cash:

CF for payback in Year 0 =
Total Installed Cost
- Total IBI
- Total CBI

Note. If you specify that the IBI and CBI are taxable incentives on the Cash Incentives page, the incentives reduce the Year zero cost, but increase the Year one taxes (reducing the tax savings). In some cases, if you increase the IBI and CBI amounts, you may not see the reduction in payback period that you expect.

For the residential standard loan option:

For the residential mortgage option, debt interest payments are tax deductible and are included in the state and federal tax savings amounts, so SAM subtracts tax on debt to remove the effect of debt from the payback period equation:

For commercial projects, both the energy value and debt interest payments are tax deductible:

The effective tax rate is a single number that includes both the federal income tax rate and state income tax rate:

The federal and state tax rates are input variables on the Financial Parameters page.

Cash Flow for Discounted Payback Calculation

For the discounted payback, the cash flow for calculating payback is discounted at the nominal discount rate: