Paybacks

This page is about whether I should spend money to get a saving, or whether to invest the money instead. This is for me to consider solar panels, home batteries charging overnight with Economy 7 and discharging at other times, etc.. I’ve made a spreadsheet (see below) where I can type is capex and savings to see how long it really takes to get into a better financial position.

Vendors often talk about payback, which I normally refer to as “crude payback”. If the fully installed spend is £10,000 and the annual saving is £1,000 then the crude payback is 10 years. But what if I invest the £10,000 instead?

Vendors also like to amortise the capex, but I find that misleading for personal finance: I want to know the cash position. Amortising is perhaps a better model for companies with ongoing operations.

In all this I have ignored any income tax. I assume that the savings cannot be offset against tax. If they could be then I would have to work out the saving after considering tax. The way that tax can come into it for me is if my investment capital gains would be taxable, in which case I think I’d calculate a net investment return (lower than the gross return) and use that in a spreadsheet.

Importantly, the investment return is “above inflation”. Where I show 0%, that is in a low-volatility gilt or bond that keeps up with inflation but no more. If I leave the money in a current account then I need to use a return of perhaps -2% or -3%. I also assume that my savings increase in line with inflation, so in my table they appear constant.

I also have to consider any maintenance as an annual cost which reduces the savings. The savings need to be “net savings”.

The table considers a £10,000 capex spend versus investing that money and getting various percentage returns. The first scenario assumes investment return in line with inflation. The 4% scenario is perhaps a typical one that many financial advisers might suggest to me. The 8% scenario is roughly in line with my investment return over the last 25 years, and is perhaps the one I should use before committing to capex. It’s worth saying that there’s no volatility considered: I assume that the investment return is average every year, and I assume that the savings don’t vary (different p/kWh, more or less maintenance, equipment failure, changes in government grants, find I’ve miscalculated the saving, etc.),

The final two scenarios are ones where I looked at hundreds of years (!) but still never achieve payback. In both cases it is when the annual investment return is the same as the capex saving. Even after decades the capex does not reach payback. Of particular note, a 20-year crude payback (perhaps solar panels at today’s costs) will never pay back against an investment getting a not-inconceivable 5% above inflation. Maybe in a few years solar panels will become cheaper, but I suspect that home batteries will become justifiable sooner than solar panels.