The Rooftop Solar Decision
A family is deciding whether to install rooftop solar panels. Their electricity bill averages $320 per quarter. A local installer quotes $6,400 for a system that is expected to cut their bill by 60%. The family has $4,000 in savings and could borrow the rest at 5% simple interest per year, repaid over 4 years. A government rebate of $1,200 applies to the installation. The panels are expected to last 15 years.
A neighbour says: 'Solar is always worth it-the sun is free.' A financial adviser says: 'Only if the payback period is under 6 years.'
The family also reads that electricity prices are expected to rise about 4% per year.
1. Calculate the net cost of the system and the annual saving in the first year.
Read the worked answer
Net cost = $6,400 − $1,200 rebate = $5,200.
Current annual bill = $320 × 4 = $1,280.
Saving = 60% of $1,280 = $768 per year in year one.
If they borrow $1,200 (the amount beyond their $4,000 savings), the interest is 5% simple interest per year on $1,200 = $60 per year, or $240 over 4 years. This borrowing cost reduces the effective benefit in early years.
2. Is the neighbour's claim ('solar is always worth it') supported by the numbers? Use the adviser's 6-year rule.
Read the worked answer
Simple payback (ignoring interest and price rises) = $5,200 ÷ $768 ≈ 6.8 years.
That is above the adviser's 6-year threshold, so on the simple test the adviser would say no.
But two factors change the picture:
- Rising prices: a 4% annual rise means the saving grows. Year 2 saving ≈ $768 × 1.04 ≈ $799, and so on. The cumulative saving reaches $5,200 sooner than 6.8 years-roughly 6.3 years.
- Borrowing cost: the $240 interest pushes the true cost to about $5,440, lengthening payback slightly.
Net judgement: payback is close to the 6-year line-roughly 6.3–6.5 years. The neighbour's absolute claim is not supported: 'the sun is free' ignores installation cost, interest and the fact that payback depends on assumptions. The adviser's rule gives a borderline 'no', but over the 15-year life the system clearly saves money. The honest answer is 'marginally justified, sensitive to assumptions', not 'always worth it'.