2. Analyze the following policy ideas to encourage investment in wind farms. Show the incremental effect on NPV of an average wind farm and the incremental effect of taxes collected by the Government.

1. A. Reducing the corporate tax rate on wind farms to 30%.
2. B. The Government guaranteeing loans to wind farms, so their cost of capital is only 5%.
3. C. Charging no income taxes to new wind farms for the first five years.
4. D. Allowing wind farms to depreciate the initial investment over 3 years for tax purposes.
5. E. Allowing wind farms to fully depreciate their initial investment in the first year for tax purposes.

Appendix I: A typical wind farm in Canada Cost Structure.

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