PNG

PNG


Your firm is considering an investment in a wind farm. Assume that the farm will cost $1 million per MW of installed capacity. The plan under consideration would deploy 10 GE 1.5 MW. You are to assess the after-tax profitability of this plan. The wind farm will be placed in a Class 6 wind area, generating an estimated average of 8760 MWh per turbine per year. The price of energy produced is $0.067 per kwh and a production tax credit provide an additional $0.022 per kwh for the first 10 years. You can obtain a very low interest loan for your investment, with an effective interest rate of 2.5% that you will pay off over 30 years. Assume that transmission lines will be provided by a local utility at no cost. Operating expenditures are $10,000 per year, mostly for insurance and occasional maintenance. Your corporate tax rate is 30%. Discount real profits or losses at a rate of 10%. For the three options below, generate an annual nominal cash flow, annual before tax profits, annual after-tax profits, and net present value after tax of the windfarm for the first 20 years (using traditional NPV calculations"??do not worry about WACC), assuming zero salvage value and that you have no other deductions or credits for taxation except interest and:

The wind turbines can be straight-line depreciated over 15 years.

The wind turbines can be MACRS depreciated at 300% declining balance over 6 years,

switching to straight-line depreciation on the adjusted basis (as in 4) if ever that

provides a greater deduction.

The wind turbines can be depreciated 100% in the first year.

Is the wind farm profitable in NPV terms under any of these scenarios after 20 years? Which depreciation method is preferable? Why?