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.
tl;dr: Installing solar is the winner.
Here are the assumptions this calculation is based on:
- Installing solar will cost $20K, and you have the cash to pay for it.
- If you don't install solar, you could invest the $20K cash in a mutual fund and earn 8%.
- 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.