Your family owns a sheep farm on a rocky hill in rural Wales that has been able to earn much from this land , but have always been proud to own the highest peak in the region. Helped by the arrival of wind power, you plan to impress your prospering farmer-neighbour by building a wind turbine on the family hill.
the WindWow 500 turbine , which is the most efficient wind turbine currently on the market and produces 500 kW peak power, would cost £1m. It has an expected life span of 15 years. Installing the turbine and connecting it to the electrical grid would cost another £400,000. All installation work would be completed this year, so production of wind energy could start next year.
Annual maintenenance costs would be 2% of the price of the turbine. The Meteorological Office estimates an average wind speed of 7m/s for your location, which translates into an expected production of 1,400,000 kWh of electrical energy per year.
Your plan is to run this project as a limited company, sell the electricity and make a healthy profit. Under the current feed-in tarriff scheme, you would get 11 pence per kWh of electrical energy produced and a further 5 pence for each kWh you sell to the grind (i.e. that you do not consume yourself but export). These rates will be guaranteed by the government for the life of the project. There are no capital allowances. The corporate tax rate is 20%, and tax is payable in the smae year which the underlying income is recorded. Inflation is assumed to be negligible. Your required rate of return for projects with similar risk is 6% per annum.
evaluate the feasibility of this project by answering the following questions
a) What is the net present value (NPV) of the wind turbine project? based on the NPV, would you build the turbine?
b) what is the payback period of this project?
c) the family farm currently pays an average price of 16p/kWh for the electricity it uses. How would it affect your decision to build the wind turbine, if you chose to consume 50% of the energ produced yourself and export the remaining 50% to the grid?
d) How does it affect your decision to invest in this project if it later turns out that the turbine life span is only 10 years.
e) To further impress your neighbour, you would like to paint the turbine blades in the famly colours (yellow, red and green). How would you use the cost of the paint of £4000 in your investment decision.