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I am a moderately experienced investor, but I have this one question that I have had a really hard time answering. What would be more profitable: invest in solar electricity, which I have calculated will lead to a net surplus of $60,000 in 15 years (savings on no electricity bill plus income on SRECs and annual utility credit), or invest the $20,000 in a mutual fund. On the surface, investing the $20k into a mutual fund at 8% would give me $63,433 in 15 years, but if I install the solar array I will be investing the roughly $2000 in income that I earn each year. I feel like there must be a simple way to calculate this but I can't wrap my head around it.

  • while no investment in a mutual fund is guaranteed, how solid are your estimates for the solar? Are you sure your electric bill will be zero? And that you will even make more electricity than you will use? – mhoran_psprep May 3 '18 at 10:14
  • Fairly certain based on a neighbors system, comparison of install cost, etc. Obviously some room for variation, but even with an estimated return, I am hoping to be able to make calculations based on what I asked. – Craig May 3 '18 at 11:17
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    Do you know of any mutual funds that guarantee 8% per year for the next 15 years? – Bob Baerker May 3 '18 at 13:11
  • No guarantees. I used 8% as variable. What I am asking for is a way to calculate, and I could obviously then use different rates in that calculation. – Craig May 3 '18 at 16:17
  • @Craig Set up two spreadsheets. In the first one, include all solar investment variables (savings, credits, income on SRECs, etc.). In the second one, pick the mutual fund(s) that you'd be likely to invest inand include expected historical distributions based on previous years (deduct taxes on them, if any), etc. Vary the expected yield on the MF and see at what MF yield the results are equal. – Bob Baerker May 3 '18 at 16:57
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tl;dr: Installing solar is the winner.

Here are the assumptions this calculation is based on:

  1. Installing solar will cost $20K, and you have the cash to pay for it.
  2. If you don't install solar, you could invest the $20K cash in a mutual fund and earn 8%.
  3. Based on your statement that in 15 years you would have a net surplus of $60K, this means having solar will net you $4K per year compared to not having solar. Perhaps this comes from $2K/year in savings from not having an electric bill, and another $2K in income from power you provide to the grid. Either way, you can invest that $4K/year additional cash flow into a mutual fund and earn 8%.

Compare (using a calculator):

  • $20K at 8% for 15 years = $63,443
  • Starting with $0, and adding $4K per year at 8% for 15 years = $117,297

Solar clearly wins.

But is the additional $2K per year in income taxable? Even in a worse case scenario with a 50% effective tax rate, you'd still be able to invest $3K/year:

  • Starting with $0, and adding $3K per year at 8% for 15 years = $87,973

Solar still clearly wins.

Let's suppose you only invested $2K per year (simply because you mentioned that in your question):

  • Starting with $0, and adding $2K per year at 8% for 15 years = $58,649

This is about $5K less than the investing the $20K in a fund, however, none of the above calculations took into consideration that the value of your home should be increased due to having solar. Presumably the value would still be significant until the warranty runs out, which is typically at least 20 years, once again tipping the scales in favor of solar.

  • I would be investing $2000 per year since the additional savings I am calculating is on not paying an electric bill, but that savings will obviously free up funds that I can probably manage to invest, so both of your calculations are helpful. While you are correct that the pv (solar) system will add value to my home, I have heard from multiple agents and developers that it will not increase my asking price. This is hard to imagine, but somewhat irrelevant in this case I do not plan to sell in the next 20 years. Thanks for the help. – Craig May 4 '18 at 11:54

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