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Initial Cost: $70M. Life of turbines and related equipment: 10 years. Land is leased and is...

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.

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Answer #1

Solution :-

Calculation of NPV
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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