[tlb]

Payoff time calculations shouldn't include opportunity costs. Calculating opportunity cost would require knowing about every other possible project.

The right procedure is to calculate payoff periods for each project separately. Then, when deciding which projects to fund, you choose them starting with the shortest payoff times until your budget is used up.

[bongobingo]

Opportunity cost is simple. It’s a calculation of what your money could have been doing if you put it to use doing something else. The easiest to estimate is the market opportunity cost.

If you spend $10,000 on a solar installation that is $10,000 you could have put in the market. After 15 years you saved $10,000 in electricity, and you’re supposedly profiting. However, that $10,000 investment would have grown to $24,000 at a modest 6%. So you’re actually still in the red, and you’ll likely never catch up and break even.

If you took out a loan it’s the opportunity cost on the payments. There is actually a theoretical break even here, but it’s not 15 years.

If you’re doing it for some altruistic reasons then it doesn’t matter. But if you’re making a payback calculation, you should do it properly. Opportunity cost is a real thing.