Understanding the net present value

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jmedrado
Topic Author

19 Mar 2019 18:21 #6707 by jmedrado

Understanding the net present value was created by jmedrado

Hi,
My name is Jessica Medrado and I am a grad student at UCSD. I am currently learning SAM to use in the economical analysis of a solar water heater and my question is as follows. Consider input values that results in a negative net present value. When keeping the same input, but decreasing the debt fraction, the net present value becomes more negative. I was expecting that decreasing the debt would help to improve the net present value. Could you help me to understand that?

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pgilman

19 Mar 2019 23:44 #6708 by pgilman

Replied by pgilman on topic Understanding the net present value

Dear Jessica,

Decreasing the size of debt can have an unexpected effect on the net present value because it increases the initial investment cost, decreases annual debt payments, and decreases the annual debt interest tax deduction (unless you are using the Residential financial model with the standard loan option instead of the mortgage option -- for standard loan, debt interest is not tax deductible).

My guess is that the reduction of the tax benefit is causing the net present value to decrease rather than increase.

You can see the effect of changing the size of debt on the project cash flow in the table on the Cash Flow tab of the Results page.

Best regards,
Paul.

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