Austin Jettie, president and CEO of Breckenridge Peak Mountain Resort, is worried about energy costs. Primarily a ski resort, Breckenridge Peak's business is very energy-intensive, mainly because most of the winter snow is manufactured by machines that run on electricity. Strong conservation campaigns over the years have reduced energy consumption by 25 percent, but the resort still consumes about 7.5 million kilowatt hours (kWh) of electricity each year, with about 60 percent used during the peak winter months. Last year, electricity costs were about $0.11 per kWh, but this season, the cost skyrocketed to $0.16 per kWh - an increase of almost 50 percent. Even before the electricity cost increase, Breckenridge Peak had tried to operate as efficiently as possible to minimize its electricity consumption. As examples, 1,800 new fluorescent bulbs were installed in the lodge, replacing incandescent bulbs; high-efficiency lights had been installed on the ski runs that automatically dim to half wattage during night maintenance work; half of the snowmaking system had been converted to zero-energy gravity-feed. Breckenridge Peak was even a test site for the development of revolutionary new high-efficiency "guns" for the snowmaking machines. This new snowmaking technology uses 40 percent less electricity than the older version. In the 1990 s, the resortwon an energy conservationrecognition award from Colorado Electric for saving over one million kWh of electricity from its improvements in snowmaking, lighting, and elsewhere. But there is only so much Breckenridge Peak is able to achieve in energy conservation with its existing facilities and still offer high quality recreational services. Jettie has realized that a more ambitious energy reduction initiative is needed, and so he and resort managers are now considering harnessing an abundantrenewablegreen resourcereadily available to the mountain resort: wind power. THE WIND TURBINE PROJECT PROPOSAL Jettie has been in the ski resort business long enough to know that the Rocky mountaintops can get very windy in the winter. He has decided to investigate the feasibility of erecting a wind turbine to put the mountaintop wind to profitable and "green" use to help stabilize the resort's electricity costs. In addition, this would be consistent with Breckenridge Peak's corporate mission to protect the environment and should also permit the use of "green marketing" in the hope of attracting even more visitors to its popular ski slopes. Breckenridge Peak managers recognize that determining the viability of installing a wind turbine will be a complicated, specialized process, and so they have engaged Environmental Projects Consultants, Inc. (EPC) of Ontario, New York, to examine the feasibility of such an investment. EPC's fee is $157,000. With EPC's help, Breckenridge Peak has already received a small grant of $15,000 from the Colorado Technology Collaborative to offset part of the cost of the formal feasibility study. The feasibility study is to cover the financial, technical, social, and environmental aspects of the proposed wind turbine. You are the leader of the EPC wind turbine feasibility study team with the responsibility for preparing the memorandum outlining the study's findings and the team's recommendations for Breckenridge Peak's management. Breckenridge Peak opened in the Rocky Mountains of western Colorado in 1948. By 2005 it was larger than any other skiing and snowboarding resort in the region. During this time period, it evolved into a four-season resort, offering skiing, mountain biking, and other outdoor sporting activities. Through good management and sound development, Breckenridge Peak became a popular winter ski destination that covers 170 acres, with 45 ski and snowboard trails, three terrain parks, and nine lifts, including a high-speed six-person chairlift. Savvy marketing and attractive mountain facilities have enabled the resort to operate profitably even in the summer. For summer sport enthusiasts, Breckenridge Peak installed the first mountain coaster in the area, an alpine super slide, a giant swing, scenic rides, a rock climbing wall, a "euro-bungy" trampoline, hiking, and, for children, rope adventures, mini-golf, a rope spider web, and an inflatable "bouncy bounce" playground. Winter visitors number about a 250,000 annually, while summer visitors average about 100,000 . The EPC team has established that there is enough wind on the west shoulder of Breckenridge Peak's mountain to effectively use a wind turbine. Significantly, the wind force on the mountain is strongest during the winter, when Breckenridge Peak's demand for electricity is at its greatest for snowmaking, ski lifts, and lighting. Breckenridge Peak consumes about 4.5 million kWh of electricity during the winter, which is 60 percent of its total annual needs. GE Energy, a unit of General Electric, is able to provide a 1.5MW-capacity wind turbine to Breckenridge Peak within a year at an estimated total purchase and installation cost on the proposed site of $3.9 million. Subject to a favorable feasibility study, a loan of \$3.3 million for 10 years is available from Breckenridge Peak's local bank at an annual interest rate of 7.3 percent (see Exhibit 1 for the Amortization Schedule). A grant of $582,000 is available from the Renewable Energy Trust Fund administered by the Colorado Technology Collaborative to complete the financing for the proposed wind turbine purchase and installation (this grant effectively brings down the cost off the investment to $3.318 million). Funding for the Renewable Energy Trust Fund comes from a charge on Colorado electric bills. Although erecting the wind turbine on the proposed site would partly hide it from the view of skiers, the local bank management would be able to see the wind turbine through a window in the bank's boardroom and, perhaps alarmingly, observe the bank's loan collateral when the blades were not turning because of insufficient wind strength. Breckenridge Peak management and the EPC team are concerned about general community acceptance and support for the wind turbine project. The local community is very concerned with aesthetic and environmental issues. The proposed GE Energy wind turbine is taller than the Statue of Liberty. Its three 123 -foot blades are each longer than three school buses placed end to end. Local residents may not be happy with such a large structure being erected at the top of the mountain. Also, the construction materials would travel noisily through the local community on trucks and add to road congestion. One suggested idea to help gain community acceptance and enthusiasm for the project is to invite the public to submit names for the wind turbine in a "Name That Turbine" competition. A well publicized ceremony could be held to announce the winning name and to tout the environmental and social benefits of the wind turbine. The GE Energy unit would provide about one-third of Breckenridge Peak's annual electrical needs. With electricity, the matching of generation with consumption is an important issue because electricity cannot be stored for use later. With sufficiently strong winds, the turbine generates power 24 hours a day, seven days a week, much of the time when Breckenridge Peak does not need that level of power. Fortunately, with the winds on Breckenridge Peak at their strongest in the winter, the turbine turns faster, generating more electricity. This phenomenon matches up nicely with the resort's higher electricity demand for snowmaking in the winter. The wind turbine is expected to supply up to one-half of Breckenridge Peak's winter electricity needs. Electricity generated by the wind turbine is expected to result in cost savings from buying about 2.3 million fewer kWh per year. In addition, excess electricity generated by the wind turbine can be automatically diverted to the power grid and sold for an estimated $161,000 each year. An important financial component of the wind turbine project is the sale of renewable energy credits (RECs) to a third party. There is a ready market for these credits because they certify that the purchaser of the credit purchased renewable energy. Third parties have already agreed to purchase Breckenridge Peak's credits for 10 years at $166,667 per year, and it is to be assumed in the feasibility study that sales of RECs will continue at this level for the remaining years of the wind turbine's life cycle. In addition to the RECs, the wind turbine would enable Breckenridge Peak to benefit from $46,000 per year in renewable energy production tax credits for 10 years, and it qualifies for MACRS (Modified Accelerated Cost Recovery System) doubledeclining balance depreciation for a five-year period with half-year depreciation in the first and lastrecovery years. Also, the new turbine would enable Breckenridge Peak to open from two to four weeks before other area resorts because of the cheaper snowmaking from using wind power. This is estimated to generate an additional $100,000 net cash inflow per year. Breckenridge Peak management estimates that a wind turbine service contract, insurance, and other maintenance would cost about $75,000 annually. Based on discussions with Breckenridge Peak management, EPC has determined that: - Breckenridge Peak is subject to a 40 percent income tax rate; - Breckenridge Peak has sufficient taxable income to benefit from any deductions and credits that result from the wind turbine purchase; - The after-tax weighted average cost of capital is 6 percent for discounting the expected cash flows of the project; - While MACRS (Modified Accelerated Cost Recovery System) double-declining balance depreciation for a five-year period with half-year depreciation in the first and last recovery years allows for depreciation to occur over a 6 year period, the wind turbine has a 25-year useful life with no terminal disposalvalue (see Exhibit 2 for the Depreciation Schedule). TASK: You have been hired to provide recommendations on a decision to invest in a wind turbine for electricity generation. Currently the company purchases all of its energy needs from the Colorado Electric utility company. Significant energy costs increases made management consider installing a wind turbine to partly generate its own power. Your task is to prepare an analysis with your recommendations on the proposed wind turbine installation to Breckenridge Peak management. Prepare a capital budgeting analysis of the wind turbine project using the Net Present Value method. As always, clearly state any assumptions used and fully reference any sources accessed for information. Consider other factors besides accounting factors (for example environmental, social, etc.). Based on your professional judgment, explain to the client why your work is so important to their business