Investment Return Targets |  |  |  |

For projects with Utility and IPP or Commercial - Third-Party Ownership financing as defined in the Technology and Market window, Solar Advisor calculates an internal rate of return (IRR), minimum debt-service coverage ratio (minimum DSCR) and first year electricity sales price (1st year PPA price) that meet the targets and constraining assumptions defined on the Financing page. Because the IRR, minimum DSCR, and 1st year PPA price variables are interrelated, Solar Advisor uses an iterative algorithm to calculate their values.

Note. Annual values of the required revenue, after tax cash flow, interest and principal payments, and operating cost variables shown in the equations below can be found in the project cash flow.

The internal rate of return is the discount rate, IRR in the equation below, that corresponds to a project net present value, NPV, of zero:

The debt service coverage ratio in each analysis year (DSCR n) is the ratio of operating income to expenses in that year:

The minimum DSCR is the lowest value of the project's debt-service coverage ratio that occurs in the life of the project:

Solar Advisor calculates the first year sales price by using an iterative search algorithm to find the first year sales price that, when inflated using the PPA escalation rate, meets the appropriate constraints in the equations below. These constraints are inputs on the Financing page.

For projects with Utility and IPP financing, the constraints are the Minimum Required IRR and the Minimum Required DSCR constraints, and a positive cash flow requirement:

Find FirstYearPPA such that

Actual IRR ≥ Minimum Required IRR, and

Actual Min DSCR ≥ Minimum Required DSCR, and
Cash Flow in Year n > 0 (when the cash flow requirement is positive)

For projects with "Third Party System Ownership" financing, the constraint is the minimum required IRR:

Find FirstYearPPA such that

Actual IRR ≥ Minimum Required IRR

Note that the minimum required IRR and DSCR are user input variables on the Financials page. The positive cash flow requirement is set by a check box on the Financials page.