ROA

[Rogério]

Hi folks!

Does anybody know how PVSOL calculates the return on assets (ROA)?

I would be grateful if anybody could advise.

Regards,

Rogério.

[developer_mh]

Hi Rogério,

the return on assets (or return on investment) in general is your net income (after 20 years normally) in relation to your investments. I think it is best explained with an example (I took the example project "photoplan.pvprj"). In the results you have, amongst others, these figures (the important ones are bold):

System Data
Grid Feed-in in the first year (incl. module degradation)	10.966	kWh/year
PV Generator Output	11,8	kWp
Start of Operation of the System	01.01.2017
Assessment Period	20	Years
Economic Parameters
Return on Assets	4,41	%
Accrued Cash Flow (Cash Balance)	9.346,78	$
Amortization Period	13,4	Years
Electricity Production Costs	0,08	$/kWh
Payment Overview
Specific Investment Costs	1.400,00	$/kWp
Investment Costs	16.464,00	$
One-off Payments	0,00	$
Incoming Subsidies	0,00	$
Annual Costs	115,25	$/year
Other Revenue or Savings	0,00	$/year

 

So, you invested 16464 $ in your PV plant, and after 20 years you have an acrrued cash flow of 9346.78 $. You have a return on assets (ROA) of 4,41 %, which you can think of as the virtual interest rate that you would have needed if you gave your investment (16464 $) to a bank for 20 years in order to get a total of 25810.78 $ (16464 + 9346.78 $).

In other words, if you decided not to build the PV plant but invest your money in an asset with some interest rate, you would have needed an interest rate of 4,41 % to get the same net income in the end as with you PV investment.

In our online help you'll find the formula for the cash value for more detail. This symbolizes the value of your assets in comparison to an investment in a bank account with a fixed intereset rate. If your cash value after 20 is 0 it means that you have the same ROA from your PV investment than you would have on a bank account for a given interest rate. And that is the way the ROA is actually calculated: In the fomula of the cash value you put in a interest rate (q), you get a cash value of xx, you put in a higher interest rate, you get a smaller cash value and so on, until the cash value is 0. The interest rate you have then is the ROA.

That means, if you put in the 4,41 % as your return on capital, like so:

you get an accured cash flow of approx. 0 $ after 20%:

Economic Parameters
Return on Assets	4,41	%
Accrued Cash Flow (Cash Balance)	145,86	$
Amortization Period	More than 20	Years
Electricity Production Costs	0,12	$/kWh

 

 

I hope this helped. If not, please don't hesitate to ask!

Kind regards,

Martin

[Rogério]

Martin,

Thanks for your prompt response.

You correctly explained how the TIR (Tax Internal Rate of Return) works. For sure this is one of the most popular indexes to analyze a discounted cash flow. However, If we export PVSOL cash flow to na Excel, for example, and calculate the Tax Internal Rate of Return using function =TIR, you will figure out that the number you get is completely different from ROA in PVSOL.

Have you ever reproduced in an Excel the ROA outcome you get in PVSOL? I simply cannot calculate it in Excel and thus cannot explain it to my customers.

 

Thanks again for your time.

Regards,

Rogério.

[Rogério]

Martin,

Sorry, consider TIR = IRR funcion in Excel. TIR is portuguese version.

Ragards,

Rogério.

 

[developer_mh]

Hi Rogério,

the secret is that you'll have to calculate it on a monthly basis in excel. Sometimes you don't have full years in the beginning, e.g. when your PV system is connected to the grid on 01st of September, so we have to all of our financial calculations in PV*SOL based on months.

If you want to calculate the IRR in excel, do the following: In our example above we have the investment of 16464.78 $ in the beginning (January of Year 01) and the operating costs of 115.25 $, which gives us -16,579.25 $. From month 02 to month 11 there are no costs or incomes, so you'll write $ 0 there. Then, in December you'll get the income from the feed-in tariff, 1,344.33 $ in our case.

The data in your excel sheet will look like this:

and so on, for all the years (21 normally).

Now, when you calculate the IRR with Excel, =IKV(C5:C256) in our case or =IRR(C5:C256) in the English version, you get a monthly IRR or ROA of 0.368%, which you can multiply by 12 to get the 4.41% annual IRR/ROA.

Of course, if you have starting dates other than 01st of January, you'll have to adapt your monthly cash flows accordingly.

Hope this helps, kind regards,

Martin

 

[Rogério]

Martin,

Bingo!!!! That´s the answer I was looking for.

Thanks for your assistance!

Regards,

Rogério. 

[Jordn]

Hi Martin @developer_mh

Just a clarification please, in the Presentation Report: Financial Analysis, Overview, Economic Parameters.......  I'm not a Jedi on the naming of financial terms, forgive me if I'm wrong, but the naming of "Return on Assets" in the report, because this parameter is calculated similar to the IRR method in excel - shouldn't it be referred to as "IRR - Internal Rate of Return"?

 

Yours,

Jordan

 

[developer_mh]

Hi Jordn,

yes, I guess you are right, the naming (more precisely: the english translation) there is incorrect. While ROA (or ROI) is approximately equal to the IRR over one year, they mean something different over the course of several years.

Thanks for pointing that out, we will fix it in one of the upcoming releases.

Kind regards,

Martin

[topper_back]

With investment 16464 at 4.41% compound interest rate for 20 years, that would give = 16464*(1+0.0441)^20 =39028. How did you calculate 25810.78? Or contrary, how did you calculate 4.41%, when it should be 2.27% for the formula to work.

[developer_mh]

Hi topper_back,

the IRR is calculated on the basis of the cashflow, not just the initial investment. From the Microsoft Support Website:

Quote

Returns the internal rate of return for a series of cash flows represented by the numbers in values. These cash flows do not have to be even, as they would be for an annuity. However, the cash flows must occur at regular intervals, such as monthly or annually. The internal rate of return is the interest rate received for an investment consisting of payments (negative values) and income (positive values) that occur at regular periods.

The approach you use in your example refers to the annuity calculation.

Kind regards,

Martin

[sunil]

On 12/6/2022 at 5:23 PM, developer_mh said:

we want to remove IRR from the generated PDF, we dont want to show this can you pplease guide how we can remove.

 

[developer_mo]

Hi sunil,
unfortunately, it is not possible to remove individual table rows from the presentation via the project settings. To remove the IRR, I recommend exporting the presentation as a Word file and deleting the corresponding two lines (under the Project Overview and in the Financial Analysis headlines). If the entire financial part should not be included in the presentation, this can be done via > Program options > Presentation (see screenshot).

Kind regards
Mikio