About the IRR Calculator
Internal Rate of Return (IRR) is the discount rate at which a solar project's Net Present Value equals zero — in other words, the annualised return the project earns on every rupee of equity invested. It is the standard metric used by investors and lenders to compare solar against other asset classes.
Formula
0 = Σ [Cₜ ÷ (1 + IRR)ᵗ] for t = 0 to n
- Cₜ
- Net cashflow in year t (₹): negative in year 0 (capex), positive in subsequent years (savings − O&M)
- IRR
- The rate that makes the sum zero (solved iteratively)
- n
- Project life in years (typically 25 for solar)
How to calculate it
- 1Build a year-by-year cashflow: Year 0 = −(net capex after subsidy); Years 1–25 = annual savings minus O&M, applying 0.5%/year degradation and modelled tariff escalation.
- 2Add any terminal residual value in year 25 (panel scrap + inverter salvage).
- 3Solve for the rate r such that NPV = 0 (the IRR), typically using Newton-Raphson or bisection iteration.
- 4Compare IRR against your hurdle rate (cost of equity or WACC). If IRR > hurdle rate, the project is viable.
Worked example
A 100 kW rooftop C&I system: capex ₹55 L, net investment after AD benefit ₹39 L, annual net cashflow rising from ₹8.5 L in Year 1 to ₹15 L by Year 20 (3.5% tariff escalation, 0.5% degradation, 1% O&M). IRR ≈ 18–22%, well above a typical 12–15% hurdle rate for Indian solar projects.
What you can calculate
- 25-year IRR
- Hurdle rate check
- Sensitivity analysis
- Tax benefits
Standards & references
Frequently asked questions
What is a good IRR for a solar project in India?
Utility-scale projects typically target 12–16% equity IRR. Rooftop C&I projects (with accelerated depreciation) often achieve 16–22%. Residential projects with PM Surya Ghar subsidy can deliver effective IRRs above 25% because of the subsidy's direct reduction of the invested base.
How is IRR different from ROI for solar?
ROI is a simple ratio of total return to total investment, ignoring the time value of money. IRR accounts for when cashflows occur — an early payback is worth more than a late one at the same nominal value. IRR is the preferred metric when comparing solar against other investments or evaluating project finance.
What assumptions most affect a solar project's IRR?
The four biggest levers are: (1) capex per kWp (lower is better), (2) tariff escalation rate, (3) initial specific yield / CUF, and (4) degradation rate. A 1% change in annual tariff escalation can move IRR by 1–2 percentage points over a 25-year life.
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