Path-Q Solar
How should a business compare solar savings with investing the same capital in equipment expansion?
Answer
Compare solar with equipment expansion using the same time horizon, after-tax cash flows, financing assumptions, risk treatment, and capital constraints. Evaluate each option by expected return, payback, net present value, operational impact, and strategic value rather than comparing headline savings alone.
Key points
- For solar, include installation cost, operating costs, degradation, bill savings, incentives only if verified, financing, and residual value.
- For expansion, include purchase cost, additional revenue or margin, labor, maintenance, working capital, taxes, and execution risk.
- Use the business’s opportunity cost of capital or an appropriate hurdle rate.
- Test downside cases such as lower solar production, lower sales, delays, and higher operating costs.
What it depends on
- Available capital and financing alternatives
- Business hurdle rate and tax position
- Solar bill structure and expected production
- Expansion demand, margins, and utilization
- Useful life and resale value of each investment
Risks and trade-offs
- Solar may provide more predictable savings but less growth than expansion.
- Expansion may produce a higher return but carry greater execution and demand risk.
- Using cash for either option can reduce liquidity for emergencies or working capital.
Information you may need
- Solar proposal with production and cash-flow assumptions
- Equipment expansion budget and operating forecast
- Financing offers and repayment schedules
- Business tax and capital-allocation assumptions
- Sensitivity analysis for both options
Your next step
What to do next
Build a side-by-side after-tax cash-flow model using the same discount rate and downside scenarios for solar and equipment expansion.
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