LAB 5 1
Typesof costs and revenue that needs to be considered in wind turbinedevelopment
Towers and Turbines
Site prep and foundation construction
Feeder line construction
Access road construction
Operations and Maintenance
Warranty, Insurance, Legal
Dismantling and disposal
Income from electricity sale
Whyis it important to uncover every cost and revenue stream?
Theprimary objective of every investor is to maximize returns and lowestrisk possible (Arnold, 2010). It is, therefore, important to evaluateevery potential project that the developer or investor is about toinvest in. The profitability of the project is assessed by uncoveringevery cost and revenue stream associated with it. The totalanticipated cost is deducted from the anticipated total revue toobtain the expected profit of the project. However, one is requiredto take into account the concept of time value of money whileassessing the profitability of the projects. Therefore, theimportance of uncovering every possible cost and revenue stream is toevaluate the profitability of the project. The projects having higherbenefits and lower costs are more preferable (Brealey & Myers,2010). However, there are some exceptional cases where a project withhigher cost and lower benefits may be acceptable.
Rate, r = 4% p.a
Futurevalue, F.V = $5,000,000
Numberof periods, n = 4
Type= one time discounting
PV =FV =FV
FV = $5m
FV = $400,000
FV = $3000
n= 160 – (2015 – 1867) = 12
Annuity A = $350
PV =A * 
=350 * = 350 × 6.4177= $2,246.2
Ans:The present value of the annuity is lower than $3,000 this impliesthat the deal is not good therefore I would not go for it.
Annuity A = $100,000
PV =A * 
=100,000 * = 100,000 × 7.3600 = $76,000
Annuity A = $50,000
PV =A * 
=50,000 * = 50,000 × 11.4699 = 573,495
Therefore,the present value of the prize is $573,495
FV = $500
Therefore,$500 discounted 10years at 5% per annum is more
Annuity A = $1,000,000
PV =A * 
=1,000,000= 1,000,000 × 9.6203 = 9,620,300
Therefore,the present value of the gift is $9,620,300
Calculatingthe present value of all cost (see the excel spreadsheet attached)
Where A is the cost, r is the discounting rate = 9%
Thepresent value of the cost associated with this project is $4,486,893.This is as calculated with the excel functions in the spreadsheetabove.
Thepresent value of all electricity sold to NSPI can be calculated asshown below.
PV = A
Therefore,the present value of the electricity sold to NSPI is 5,011,310
Calculatingthe NPV of the project
TheNet Present Value (NPV) of a project is calculated by deducting thepresent value of the costs from the present value of the benefitsderived from the project. This as shown in the formula below
NPV= PV(Benefits) – PV(costs)
=5,011,310 – 4,486,893 = $524,417
TheNPV of the project is positive and this means that the project isprofitable. Thus, its implementation is recommended as it will helpin maximizing the returns to the investors.
Atdiscounting rate of 16%,
The present value of the costs will be as follows.
And the present value of the benefits derived from the sale of theelectricity will be as follows
Whenthe discounting rate increases to 16% the present value of the totalcost of the project is $3,959,081 while the present value of thebenefit is $3,655,497.
Therefore,the NPV of the project will be 3,655,497- 3,959,081 = -$303,584
Ifthis is the case, NPV is negative and that this means that thisproject is not profitable and instead leads to loss if it isundertaken. This is because its cost outweighs its benefit andtherefore the project is not recommended in this situation.
Costs and Benefits of a 400kW, 8 turbine wind farm at discountingrate of 9%
The present value of the costs will be as follows.
The present value of the revenue and the net present value of theproject
(Parta – h spreadsheet for workings)
a)COMFIT program from $.499/kWh to $.45/kWh.
NPV= 4,009,338 – 4,152,380 = 143,042
NPVis positive and therefore, the investment is still worthwhile.
b)Buying the land at $900,000 instead of leasing
NPV= 4,604,528 – 4,238,959 = $365,569
Thisis a good decision since the resultant NPV of the project ispositive, and it is higher than the initial NPV. Therefore, it isbetter to purchase the land instead of leasing it.
c)If the feeder line connecting the turbine farm to the closesttransmission line
Doublesthe NPV reduces to $460,190 = (4,604,528 – 4,144,338)
Hence,this amendment does not change the initial decision.
d)Doubling the disposal costs from $22,500/turbine to $45,000, thiswould reduce the NPV. The new NPV will be $563,072
e)Increasing the operational and maintenance cost by $45,000, theNPV will reduce as shown below
NPV= 4,604,528 – 4,465,122 = 139,405
However,this does not change the investment decision since NPV is stillpositive.
f)A 1% increase in the discounting rate would result in a reductionin the NPV as follows
NPV= 4,324951 – 3,913,474 = 411,477
Anda 1% decrease in the discounting rate would result in an increase inthe NPV
NPV= 4,918,027 – 4,117,858 = $800,169
g)If average annual efficiency reduces to 20%, This will lead to anegative NPV as shown
NPV= 3,683,622 – 4,009,338 = – $325715
Ifthis is the case, the project is not worth for the investment.Therefore, the management should not accept this project at theefficiency of 20%.
h)Increasing annual maintenance b $30,000 and increasing the usefullife of the project to 25 years
NPV= 3,893,857 – 4,402,679 = -$508,821
Therefore,this decision is not recommended since it is resulting to a negativeNPV.
Changing the COMFIT program for the project causes a significantchange in the NPV. For example, in the in the above case, COMFITprogram changes from 0.499 to 0.45 which is equivalent to 9.8% whilethe NPV changes from 595,190 to 143,042 which is equivalent to 76%.Therefore, we can make a conclusion that changes in some parameterscause a higher percentage changes in the NPV. On the other hand, aparameter such as maintenance and the operational cost has aninsignificant change in the NPV. I big percentage change in themaintenance cost causes a small percentage change in the NPV.
Negativeexternalities of large wind turbine development in the HalifaxRegional Municipality
Noise– the sound from the turbines and other machinery may be too noisyto the workers and the residents leaving nearby.
Humanhealth – Most factories emit health hazardous chemicals that mayhave a negative impact on the worker and the residents.
Displacement– The construction of the site may lead to displacement of theresidents who had initially settled on the targeted land for thesite.
Positiveexternalities of large wind turbine development in the HalifaxRegional Municipality
Employment– the factory will create job opportunities for the society
Security- Halifax Regional Municipality is factory manufacturing electricityand it is believed that a well-lit place is more secure than the onewhich is not.
Infrastructure– during the construction of the access roads the project willbring an improvement in the infrastructure.
NO,this social cost is not likely to accrue since we are told that thiscost was catered for in estimating the total cost and the benefits ofthe project. The positive externalities also outweigh the negativeexternalities.
ArnoldG. (2010). Corporate financialmanagement 4thedition. Britain: Pearson Education.
Brealey,R., & Myers, S. (2010). Principles of Corporate Finance(3nd ed.). New York: McGraw-Hill.
Kieso, D., & Weygandt, J. (2012). Intermediate accounting(14th ed.). Hoboken, NJ: Wiley.
Ross, S., & Westerfield, R. (2005). Corporate Finance (7thed.). Boston: McGraw Hill/Irwin.