Personal finance newbie here, but face-punches for being deep in the pool of ignorance welcome.
I'm trying to calculate the ROI on solar panels. The challenge I'm having is with inflation. I don't know how to take it into account.
Here's the calculation:
ROI = (Gain - Cost)/Cost.
Gain is the energy savings for 25 years. (I'm assuming a 25 year solar panel lifetime.)
I've factored in for example, performance decreases on the panels, electricity price rises and the likes. But for simplicities sake:
If the solar panels save $800 a year, every year for 25 years, assuming 3% inflation, I take off 3% every year to the cumulative earnings.
Year 1: 800
Year 2: (Year 1+800)*0.97
Year 3: (Year 2 +800)*0.97
Year 4: (Year 3+800)*0.97
Year 25: (Year 24+800)*0.97
My question: Is this the right way to factor in inflation?
It seems to me that by Year 25, I shouldn't be adding in $800, because it will be able to buy a lot less goods, so it should be lower if inflation adjusted. Or maybe I'm overthinking things.
I'd really appreciate any help!