The Internal rate of return (IRR) shows what percentage per year your investment earns. It is the interest rate at which the yearly savings pay back the investment exactly over the analysis period.
This lets you compare the planned system directly with a loan rate or a savings account: an IRR of 7 % means the money invested grows as it would in an account paying 7 % interest a year. In brackets you see the surplus at the end of the analysis period – how much more you save in total than you invested.
How the internal rate of return is calculated
autarc looks at the system's payments year by year:
At the start: the
Total investmentas an outgoing payment. Subsidies from a proposal are already deducted.In every year of the analysis period: the yearly savings compared with
Current, including price increases andRecurring costs.
The IRR is the interest rate at which the discounted savings exactly equal the investment:
− total investment + Σ savings year n / (1 + IRR)^n = 0
How the yearly savings arise is explained in Profitability and Savings & bills.
Example
A system costs €10,000 and saves €1,000 every year for 20 years. For simplicity, there is no price increase.
Surplus = 20 × €1,000 − €10,000 = €10,000 Internal rate of return = 7.75 % p.a.
IRR and return on investment (ROI) compared
Many calculators show the return on investment (ROI) instead: the total savings divided by the investment and the number of years.
ROI p.a. = total savings / total investment / analysis period × 100 %
| Return on investment (ROI) | Internal rate of return (IRR) |
Calculation | Average: savings ÷ investment ÷ years | Interest rate at which the savings pay back the investment |
Timing of payments | ignored | taken into account: investment now, savings year by year |
Comparable with a loan or savings rate | no | yes |
Example above | 10 % p.a. | 7.75 % p.a. |
Why autarc uses the IRR
Comparable: The ROI is an average, not an interest rate. Comparing it with a loan rate or a savings account is misleading. The IRR can be put right next to them.
More realistic: The ROI treats savings in 15 years as if they were available today. That is why it overstates systems with a long payback in particular. The IRR takes into account that the money is spent today and only flows back over time.
Consistent: The app, the offer and the proposal all show the same value.
When is "-" shown?
Nothing is invested, i.e. the
Total investmentis 0.The savings never pay back the investment within the analysis period.
What affects the internal rate of return
Price of the system: The higher the
Total investment, the lower the IRR.Size of the savings: A high self-consumption rate, high electricity prices and a high
Yearly energy cost increaseraise the IRR.Recurring costs: Costs in the
scenariolower the IRR, costs inCurrentraise it.Analysis period: A longer period raises the IRR, because more years with savings go into the calculation.
Comparability:
Currentand thescenariomust be comparable, otherwise the IRR isn't meaningful. More in Profitability.
Frequently asked questions
Is a higher IRR always better?
With the same assumptions, yes. If you compare two scenarios via Compare with:, autarc shows the difference directly. A scenario with a higher IRR can still have a smaller surplus, e.g. if it is cheaper but saves less. So look at both values.
Why is the IRR very high?
Usually the investment is small compared with the savings – or the comparison isn't like-for-like, e.g. because an old heating system is switched on in Current but missing in the scenario. Check the price source and the components that are switched on.
Is money I could otherwise invest taken into account?
No, the IRR is the interest the system itself earns. Whether the investment is worthwhile you see by comparing it with the interest you would otherwise get for your money or pay for a loan.