IRR calculation

  • emiliano casati
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05 Aug 2019 12:46 - 07 Aug 2019 12:15 #7592 by emiliano casati
IRR calculation was created by emiliano casati
Dear Dr. Gilman, 
I'm using SAM to prepare a lecture I'll be teaching next winter at master students of the ETH University in Zürich, Switzerland.
I have some questions related to the IRR calculation for the PPA model when the "solution mode" is set to "specify PPA price". 

After the simulation is performed (I'm considering a solar tower), among the financial output metrics there are: 
  • IRR
  • year IRR is achieved
  • IRR at end of project
Questions:
  • Based on the IRR definition given, e.g., in the 1995 NREL report by Short often referenced in the SAM manual, the calculation should consider the whole investment life,i.e., the cash flows in all years. How should I then interpret the last 2 metrics above?
  • why is the "IRR target year" input playing a role even though the solution mode is "specify PPA price"?
  • notably, in this case, when the "IRR target year" input gets closer to the system life (e.g., 22 and 25 years), metrics 1 and 3 get equal. The NPV calculated with this IRR is negligible, as expected by definition of IRR
  • again under the "specify PPA price" option, when the "IRR target year" input gets smaller than the life (e.g., 20 and 25 years), metric 1 is smaller than 3 and, notably, metric 1 does NOT make the NPV vanishing! 
Looking forward to your feedback on this.

Best
Last edit: 07 Aug 2019 12:15 by emiliano casati.

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  • Paul Gilman
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06 Aug 2019 22:04 #7598 by Paul Gilman
Replied by Paul Gilman on topic IRR calculation
Dear Emiliano,

The Metrics table on the Summary tab of the Results page shows the same metrics, regardless of the solution mode you choose on the Financial Parameters page.

When you choose the Specify PPA Price option for the PPA Single Owner financial model, you should probably just focus on the "IRR at end of project" value. For the Specify PPA option, SAM sets "Year IRR is achieved" metric to the IRR target year value from the Financial Parameters page, and shows the cumulative IRR for that year as "Internal rate of return (IRR)". That might be useful for some analyses where you want to compare the IRR in a given year to the IRR over the project life.

On the Cash Flow tab of the Results page, you should see a row showing the "After-tax project cumulative IRR (%)." If the IRR target year is set to 20, then SAM will display the value in the Year 20 column from that row in the Metrics table on the Summary tab. Depending on the financial parameters, the cumulative IRR may converge on a single value before the end of the analysis period.

Note that the scroll bar on the Cash Flow tab sometimes does not appear, preventing you from seeing the entire cash flow table. To fix that problem, minimize or resize the SAM window and then maximize it.

Best regards,
Paul.

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  • emiliano casati
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07 Aug 2019 12:17 #7603 by emiliano casati
Replied by emiliano casati on topic IRR calculation
Dear Paul, thanks for your detailed and clear answer. Everything is clearer now. Also, note that in the last "question point" of my first message there was a "NOT" missing. I have edited the message and now everything makes more sense.

thanks

emiliano 

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