Lab 5 Student`s

LAB 5 1

Lab 5

Banner Number:

Lab 5

Question1

Typesof costs and revenue that needs to be considered in wind turbinedevelopment

Initial Cost

Towers and Turbines

Site prep and foundation construction

Installation

Feeder line construction

Access road construction

Permitting/Assessments

Operating cost

Site leasing

Operations and Maintenance

Warranty, Insurance, Legal

Decommissioning cost

Dismantling and disposal

Site remediation

Revenue

Income from electricity sale

Question2

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 &amp Myers,2010). However, there are some exceptional cases where a project withhigher cost and lower benefits may be acceptable.

Question3

Presentvalue

  1. Rate, r = 4% p.a

Futurevalue, F.V = $5,000,000

Numberof periods, n = 4

Type= one time discounting

PV =FV =FV

=5,000,000

Ans

  1. FV = $5m

r= 10%

n= 4

One-time

PV =FV

=5,000,000$3,415,000

Ans$3,415,000

  1. FV = $400,000

r= 5%

n= 5

One-time

PV =FV

=400,000

Ans

  1. FV = $3000

r= 9%

n= 160 – (2015 – 1867) = 12

One-time

PV =FV

=3000

Ans:

  1. Annuity A = $350

r= 9%

n= 10

Annuitydiscounting

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.

  1. Annuity A = $100,000

r= 6%

n= 10

Annuitydiscounting

PV =A * []

=100,000 * []= 100,000 × 7.3600 = $76,000

Ans:$76,000

  1. Annuity A = $50,000

r= 6%

n= 20

PV =A * []

=50,000 * []= 50,000 × 11.4699 = 573,495

Therefore,the present value of the prize is $573,495

Ans:$573,495

  1. FV = $500

n= 10

r=5%

PV =FV

=500

FV= $500

n= 5

r=10%

PV =500310.45

Therefore,$500 discounted 10years at 5% per annum is more

  1. Annuity A = $1,000,000

r= 5%

n= 15

PV =A * []

=1,000,000[]= 1,000,000 × 9.6203 = 9,620,300

Therefore,the present value of the gift is $9,620,300

FV= $1,000

n= 2

r=2%

PV =1000961.2

Ans:961.2

Question4

Calculatingthe present value of all cost (see the excel spreadsheet attached)

PV =A

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.

Question5

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

Question6

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.

Question7

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.

Question8

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.

Question9

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.

Question10

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.

Question11

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.

References

ArnoldG. (2010). Corporate financialmanagement 4thedition. Britain: Pearson Education.

Brealey,R., &amp Myers, S. (2010). Principles of Corporate Finance(3nd ed.). New York: McGraw-Hill.

Kieso, D., &amp Weygandt, J. (2012). Intermediate accounting(14th ed.). Hoboken, NJ: Wiley.

Ross, S., &amp Westerfield, R. (2005). Corporate Finance (7thed.). Boston: McGraw Hill/Irwin.