Goladen Vineyards is a successful small winery. 
The owner, Gino Colucchio, is considering an additional line of business: selling
wind-generated electricity to the local utility. Tax law requires power utilities to
purchase windmill electricity. Gino could put windmills on his current land without
disturbing the grape crop. A windmill generates 200,000 kilowatt-hours
annually, and the utility would pay $0.07 per kilowatt-hour. There are essentially
no operating costs.
At the time Gino considered purchasing his first windmill, the cost was
$100,000 per windmill. Initially he was discouraged and almost abandoned the idea. But then he learned about two government tax-credit programs that
applied to investments in windmills. First, a general investment tax credit of
8 percent could be taken. That is, Goladen’s federal income taxes could be immediately
reduced by 8 percent of the cost of the windmill. In addition, windmills
qualified for a “business energy credit” of 15 percent, reducing federal income
taxes by another 15 percent of the cost.
Assume that a windmill’s economic life is 20 years. Goladen’s required rate
of return is 14 percent after taxes, and the marginal income tax rate is 45 percent.
Assume windmills qualify for a CCA rate of 25 percent declining balance.
Y¥. Would Gino purchase a windmill without the tax credits? Calculate the
net present value.
2. Would Gino purchase a windmill with the tax credits? Calculate the
net present value. ;
3. What is the most that Gino would pay for a windmill, provided the tax
credits are available?