NPV (Net Present Value) and Discount rate

[julmou]

Hello,

In the Economic Evaluation, in the Financial parameters, in the section "Income variation over time", you can give a Discount Rate value. And I understand how it's use to calculate the NPV (Net Present Value).

But how do you estimate/determine the Discount rate value to give?  (Is it somehow related a little bit to the inflation?)

Thanks for your help

[Hizir Apaydin]

Dear Julmou,

The discount rate represents the yearly loss in value of your money over the life of your project. For example, if your initial investment is 100$ and the final value of your project is 150$ after 20 years, your project may not be profitable if 150$ after 20 years represents much less than 150$ of today.

There is no specific rule for the discount rate calculation. It implies a detailed analysis taking into account the inflation, the interest rate of the market, and some financial and ecomomical projections. If you want to estimate a simple value, you could use the interest rate of the market, and add a safety margin. For example, if your bank proposes you an interest rate of 3%/year for a deposit on an account over a period of 20 years, you could set a discount rate of 3.5% in PVsyst (3% + 0.5% safety margin). This means that with a positive NPV at the end of your project of 20 years, your photovoltaic investment would be more profitable than putting your money on an interest-bearing deposit account for the same period.

Regards.

[julmou]

Thanks so much, really interesting explanation. It's so much clearer for me now ☺️