Question

A proposed wind project would require an initial investment of $1.5 million. It is expected to have an annual net benefit of $120,000. The wind project is expected to last for 30 years. Estimate the simple payback period, benefit-cost ratio and the return on Investment. Based on the results, would you go ahead with the project? Assume Discount Rate 8%

SPP = IC/cash flow per period = 1,500,000/120,000 = 12.5years

ROI % = inverse SPP = 100/SPP = 100/12.5 = 8%

How do I estimate Benefit Cost Ratio?? Using PVS/IC

BCR = PVS/IC = B/C

PVS = (AES*Pr – O&M)*UPVF ($)

SPP = IC/AES*Pr

UPVF - uniform present value function based on discount rate

Assume Discount Rate 8%

Assume $0 Operations & Management

Initial cost = 1,500,000 million dollars

30 year duration

Answer 1

Benefit cost ratio is calculated by dividing the present value of the benefits by the present value of the cost.

To get the present value of the benefits we need to discount the future benefits at the discount rate.

PV of benefits = 120,000/1.08 + 120,000/1.08² + 120,000/1.08³+ ...... + 120,000/1.08³⁰

= 120,000/1.08 * (1 + 1/1.08² + 1/1.08³+ ...... + 1/1.08²⁹ )

= 120,000/1.08 * (1 - 1/1.08³⁰ )/(1 - 1/1.08)

= 1,350,934.00

PV of costs = $1.5 million = $1,500,000

Benefit cost ratio = 1,350,934/1,500,000 = 0.90