Question

Initial Cost: $70M. Life of turbines and related equipment: 10 years. Land is leased and is included in the income numbers below. Income before taxes and depreciation $12M per year for the first 5 years Income before taxes and depreciation $10M per year for the next 5 years. A $5 million-dollar turbine overhaul is required at the end of year 5. This cost is depreciated over the remaining 5 years. Windfarm’s have a cost of capital of 10% due to their high risk. Windfarm turbine and related equipment can be sold in 10 years for $1M, their residual value. The tax rate is currently 40% and straight-line depreciation can be used for tax purposes.

Calculate the NPV of an average wind farm under the current conditions. What is the NPV of the income taxes collected by the government for an average wind farm.

Answer #1

**Solution :-**

Years |
Cash flow | Discount factor @10% | Discount es cash flow |

1 | $9.96M | 0.909 | $9.05M |

2 | $9.96M | 0.826 | $8.23M |

3 | $9.96M | 0.751 | $7.48M |

4 | $9.96M | 0.683 | $6.80M |

5 | $9.96M-$5M | 0.621 | $3.08M |

6 | $9.16M | 0.564 | $5.16M |

7 | $9.16M | 0.513 | $4.70M |

8 | $9.16M | 0.466 | $4.27M |

9 | $9.16M | 0.424 | $3.88M |

10 | $9.16M+$1M | 0.385 | $3.91M |

Total P.V. :- | $56.56 M |

Present value of All cash flow. :- $56.56 M

Initial investment. :-$70M

**Net present Value. :- ($13.44M)**

Working Note. Calculation of net cash flow of each year

Particulars | Year 1 to 5 | year 6th to 10th |

Earning before depreciation & tax |
$12 M | $10 M |

Less. Depreciation |
$6.9M | $6.9M + $1M |

Earning before tax | $ 5.1 M | $2.1 M |

Less. Tax @ 40% | $2.04 M | $0.84 M |

Earning After Tax | $3.06M | $1.26M |

Add. Depreciation | $6.9 M | $ 7.9 M |

Net cash flow each year | $9.96 M | $ 9.16 M |

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