NPV analysis

A large wind farm is being proposed for eastern Colorado. As designed it will produce 5.5 billion kWh of electricity per year, which is contracted to be sold for $0.13 per kWh. The Federal Production Tax Credit (PTC) will add $0.021 per kWh of revenue, and selling Renewable Energy Certificates will add another $0.01 per kWh. The initial investment for the wind turbines, site preparation, linking to the grid, etc. will be $4.2 billion. The project is expected to last for 25 years. Any salvage value from the turbines will exactly offset site rehabilitation costs.

Annual operating costs will be $90 million per year (maintenance, land leases, insurance, GA&S). These costs are tax deductible. They do not include depreciation expense.

The project qualifies for accelerated depreciation. The entire $4,200,000,000 will be depreciated evenly over 7 years ($600 million per year) to zero book value.

Please show detailed calculation of the Year 1 and Year 8 after-tax cash flows for NPVs with accelerated depreciation, and Year 1 and Year 15 after-tax cash flows for NPVs without accelerated depreciation. This should present the two different cash flows used in the NPV analysis.

A. Using a 30% tax rate and a 10% discount rate compute the NPV, IRR and payback of this investment. Show the Year 1 and Year 8 calculations of your after-tax cash flows.

B. The PTC is scheduled to expire in the next few months if Congress doesnt renew it. The timing of the Congressional decision would mean that the project would not receive the PTC in any of its years of existence. If the PTC is NOT renewed, what will the NPV be? Use a 30% tax rate, a 25-year life and a 10% discount rate. Show the Year 1 and Year 8 calculation of your after-tax cash flows.

C. Suppose that lobbyists from the fossil fuel industry are putting pressure on politicians to not renew the PTC and to eliminate the accelerated depreciation available for renewable energy. Advocates for renewable energy can probably salvage one or the other (the PTC or the 7-year depreciation benefit). If the accelerated depreciation benefit is eliminated, depreciation would be spread evenly over 14 years. As an advocate for renewable energy if only one benefit is politically feasible (the PTC or accelerated depreciation) which would you argue for? Support your decision with numbers.