W10_SSD_Selection of Solar Photovoltaic System Based on External Rate of Return (ERR)

  1. Problem Definition

In this blog I am going to do find out the External Rate of Return for my PV installation, based on the data that I had used for my W4 Blog. With this Blog, I also would like to use this blog to claim for Problem Solving Work for Engineering Economic Chapter 5 Evaluating a Single Project.

The ERR calculation is based on the following formula:


Rk = excess of revenue over expenditure in period k;

Ek = excess of expenditure over revenue in period k;

N = project life

ϵ = external reinvestment rate per period

i’% = ERR

Based on equation 1-1, the following formula is developed:



  1. Alternative Identification

As per my previous blog, in this case I have 3 alternative of PV system.

The alternatives are as follow:

1.    Install 1.5kW system

2.    Install 2kW system

3.    Install 5kW system

For each of the alternatives, the current PV systems characteristic is as per Table 1.

System Capacity (kW)




No of panels (ea)




Panel capacity (kW)




Total panel capacity (kW)




Panel installation cost

$ 3,002

$ 5,162

$ 8,083

Daily PV Output (kWh)




Internal use (kWh)




Export (kWh)




Avg Annual PV Output (kWh)




Internal use (kWh)




Export (kWh)




Annual Maintenance Cost      
Checking panels $ 150 $ 150 $ 150
Panel cleaning (ea) $ 20 $ 20 $ 20
Total maintenance cost $ 270 $ 390 $ 550

Table 1. Current PV systems characteristic

The PV system capacity is degraded by 0.05% each year. The PV life time is 30 years. The inverter needs to be replaced every 10 years. The inverter cost is about 25% of the overall installation cost.

The cash flow for each of the alternatives is shown in Figure 2, 3, and 4.

Figure 2. Cash flow for Option 1

Figure 3. Cash flow for Option 2

Figure 4. Cash flow for Option 3

  1. Outcome for each Alternatives

To calculate ERR, the ϵ is set equal to MARR. As mentioned in blog W4, MARR is set to be equal to IRR. In this project only Option 2 and 3 have positive IRR. The IRR for Option 2 is 22%, while IRR for Option 3 is set at 34%. Using Equation 1-2 and 1-3, for Option 2 and 3, the i’% is calculated, as shown in Figure 5 and 6.

Figure 5. ERR calculation for Option 2

Figure 6. ERR calculation for Option 3

  1. Selection Criteria

A project is acceptable when i’% is greater than or equal to MARR.

  1. Analysis and Comparison of the Alternative

Based on the calculation result which are shown in Figure 5 and 6, the i’% for Option 2 and Option 3 are greater than or equal to MARR, which means both Options are economically justifiable. But both are coming out just barely with Option 2 seems to be slightly better. Based on this this exercise, my preference is still with Option 2 from Option 3.

  1. Performance Monitoring and the Post Evaluation of Result

As Option 2 is just barely coming out OK as an investment, I should be very care full on this investment. Further review on this investment should be performed to identify whether this investment is good enough.


Government of Western Australia Department of Finance. (n.d). Electricity prices. Retrieved from http://www.finance.wa.gov.au/cms/content.aspx?id=14703

Sullivan, W. G., Wicks, E. M., & Koelling, C. P. (2012). Engineering Economy (15th Ed.) (pp.180-185). New Jersey, United States: Prentice Hall.

Solar Choice. (September 8, 2013).Solar PV Price Index–September 2013. Retrieved from: http://www.solarchoice.net.au/blog/solar-pv-price-index-september-2013/

Blanch, C. (Aug 26, 2013). Hidden cost of rooftop solar: Who should pay for maintenance? In RenewEconomy. Retrieved from: http://reneweconomy.com.au/2013/hidden-cost-of-rooftop-solar-who-should-pay-for-maintenance-99200

Synergy. (n.d). Prices & fees. http://www.synergy.net.au/at_home/prices.xhtml

Sheftalovich, Z. (Jun 18, 2013). Solar panel payback times. Retrieved from: http://www.choice.com.au/reviews-and-tests/household/energy-and-water/solar/solar-payback-times.aspx

Energymatters. (n.d). Solar power – Perth & Western Australia special deals. Retrieved from: http://www.energymatters.com.au/specials/western-australia-solar-discounts.php

Permana, Arief. (Sept 10, 2013). W6_APE_Low Cost Hotel Accommodation-LCHA, ERR & Payback Period. Retrieved from: https://simatupangaace2014.wordpress.com/2013/09/10/w6_ape_low-cost-hotel-accommodation-lcha-err-payback-period/

1 Comment

Filed under Sadat SD, Week 10

One response to “W10_SSD_Selection of Solar Photovoltaic System Based on External Rate of Return (ERR)

  1. Excellent case study and your analysis was spot on!!! Nice work, Pak Sadat!!!

    My only advice would be from a risk management perspective, you need to build yourself at least one and preferably two week “buffer” of advanced postings. This way, if something important or unexpected does come up, you will be able to handle it without falling behind in your class work…….

    Looking forward to seeing more top quality problems and solutions like this in the future…. I am especially interested in seeing you start to transition OUT of Engineering Economy and more into Humphrey’s…..

    Dr. PDG, Jakarta

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