Discount Rate – This is the investor’s self-determined time value of money expressed as an annual percentage rate. This is the minimum acceptable rate of return required of a project before an investor is willing to invest. It may be set to what an investor can expect to make on an alternate investment. It may be set as the incremental cost of capital. It often may include an investor’s perception of the risk of the particular investment. That is, a higher return may be required for an investment which is perceived to entail more risk. A typical discount rate is 10%, although some have discount rates as high as 25%.

Internal Rate of Return – This is the annual yield of a project over its expected life, expressed as a percentage of the original investment. IRR is determined iteratively as the interest rate at which the present value of future savings is equal to the original investment, i.e. NPV = 0. In this calculator, IRR is the annualized value for “i” which completes the following equation:

Interest Rate – This is the rate at which an investor can borrow capital, usually a bank’s loan interest rate. A typical interest rate is 8-10%.

Monthly Net Cash Flow – This is the sum of monthly savings minus the monthly loan payment. A positive net cash flow will result in an accumulation of wealth.

Monthly Loan Payment – This is the amount the investor will need to pay monthly for financing the project. In this calculator the monthly loan payment is calculated as follows:

Net Present Value – The sum of immediate and future cash flows converted to today’s dollars. Money received in the future is not worth as much as money held today and is discounted by an investor’s time value of money. Typically if NPV > 0 the investment is attractive. The formula used for NPV in this calculator is as follows:

Project Lifetime - The duration of time that durable equipment will operate satisfactorily and that project changes will still represent a reasonable technical solution. Non-durable equipment, such as lighting luminaries, may need to be replaced periodically during the lifetime of a lighting project. The lifetime of energy investment projects vary. Typically a 5 year life is assumed for personal computers; 10 years for interior lighting, controls, commissioning and kitchen equipment; and 20 years for HVAC equipment and structural changes such as insulation or windows.