Problem

You are a solar power developer considering a potential project. Your installed costs are $1.70/W and all construction costs are incurred within one year. You are planning on building a 100 MW solar farm that will generate 219,000 MWh each year and the project is expected to have a 20 year operation life time. Your discount rate is 7%. The operations and maintenance costs are $15 per kW per year inclusive of land lease costs (once the project is operational). Your accountant has informed you that your expected tax bill will be $6,000,000 per year before you receive any deductions for depreciation. Right now, you can follow the MACRS 5-year depreciation schedule on all of the installed costs of your project. There is a chance that Congress will remove this benefit and you will have to use straight line depreciation. Assume that your tax rate is 35% and no salvage value at end of life.

(1) Calculate the annual reduction in your bill due to (a) 5-year MACRS depreciation, and (b) straight line depreciation.

(2) Calculate the breakeven price that you must receive per MWh of electricity under each depreciation schedule.