Question 3.

Green Batteries Pty Ltd is considering the purchase of a wind turbine generator in order to generate electricity and to reduce the electricity costs for their offices, which are located in Toowoomba. Currently the business uses 40,000 kilowatt hours (kWh) per quarter (3 months) at an average cost of $0.40 per kWh, supplied by the local coal fired power station. The current required rate of return used to evaluate projects is 6%, with a required payback period of 4 years.

The Queensland government started a scheme to provide an incentive for business to use alternative sources of renewable power. The incentives are 5% immediate reimbursement of the purchase and installation costs. This reimbursement can be paid to the supplier providing and installing the equipment. Therefore, the net cash flow from Green Batteries Pty Ltd is the purchase cost plus the installation cost less the 5% incentive back from government to offset these costs.

Project details:

	Turbine 1	Turbine 2
Cost of wind turbine generator	$10,000	$9,000
Cost to install turbine and generator (by supplier)	$750	$850
Expected cash incentive back from government to offset cost of the panels, paid immediately the wind turbine generator installed	5% of total costs	5% of total costs
Turbine expected (on average) generated kilowatt	300 kW per month	350 kW per month for first 5 yrs, then 295 kW/month for next 10 years
Generators expected life (in years)	15 years	15 years

Requirements

1. Calculate the total initial investment and the net annual savings from installing the wind generator for each of the 2 projects. (8 marks)
2. Calculate the payback period of each wind generator. (4 marks)
3. Comment on whether either project meets the companys Payback Period requirements and whether you should base your decision only in the payback period calculation.

(1 mark)

4. Calculate the net present value (NPV) of the project with a required rate of return at 6%. Where the savings are the same each year, use the present value table in Appendix 1. Where the savings differ in different time periods, you may need to subtract one NPV factor index from another NPV factor index. (12 marks)
5. Comment on whether Green Batteries should proceed with either project using the Net Present Value method. (1 mark)
6. Comment on one limitation with the payback period method compared to the NPV method. (2 marks)
7. What qualitative, non-financial factors (not included in the quantitative analysis) would influence your opinion on whether the investment in the wind generator should proceed. (2 marks)

Appendix 1: for Question 3. Present Value of an Ordinary Annuity of $1 10% 1% 2% 3% 4% 5% 6% 8% 12% n 0.926 0.909 0.893 0.952 0.943 1 0.990 0.980 0.971 0.966 1.783 1.736 1.690 2 1.970 1.942 1.913 1.887 1.859 1.834 2.577 2.4872.402 2.941 2.884 2.829 2.673 3 2.775 2.723 3.312 3.170 3.037 4 3.902 3.808 3.717 3.630 3.546 3.465 3.993 3.791 3.605 4.452 4.329 5 4.853 4.713 4.580 4.212 5.417 5.242 4.623 4.355 4.111 6 5.795 5.601 5.076 4.917 6.728 06.472 6.230 5.206 4.868 4.564 7 6.002 5.786 5.582 5.747 5.335 4.968 8 7.651 7.325 7.020 6.733 6.463 6.210 6.247 5.759 5.328 9 8.566 8.162 7.786 7.435 7.108 6.802 6.710 6.145 5.650 9.471 8.530 7,722 10 8.983 8.111 7.360 7.139 6.495 5.938 10.368 9.7879.253 8.306 7.887 11 8.760 7.536 6.814 6.194 11.255 10.575 9.954 12 9.385 8.863 8.384 12.134 11.348 10.635 9.986 7.904 7.103 6.424 13 9.394 8.853 13.003 12.106 11.296 10.563 9.898 8.244 7.367 6.628 14 9.295 13.865 12.84911.938 11.118 10.380 9.712 8.559 7.606 6.811 15 14.718 13.578 12.561 11.652 10.838 10.056 8.851 7.824 6.974 16 1% 2% 3% 4% 5% 6% 8% 10% 12% n st LO CO. Appendix 1: for Question 3. Present Value of an Ordinary Annuity of $1 10% 1% 2% 3% 4% 5% 6% 8% 12% n 0.926 0.909 0.893 0.952 0.943 1 0.990 0.980 0.971 0.966 1.783 1.736 1.690 2 1.970 1.942 1.913 1.887 1.859 1.834 2.577 2.4872.402 2.941 2.884 2.829 2.673 3 2.775 2.723 3.312 3.170 3.037 4 3.902 3.808 3.717 3.630 3.546 3.465 3.993 3.791 3.605 4.452 4.329 5 4.853 4.713 4.580 4.212 5.417 5.242 4.623 4.355 4.111 6 5.795 5.601 5.076 4.917 6.728 06.472 6.230 5.206 4.868 4.564 7 6.002 5.786 5.582 5.747 5.335 4.968 8 7.651 7.325 7.020 6.733 6.463 6.210 6.247 5.759 5.328 9 8.566 8.162 7.786 7.435 7.108 6.802 6.710 6.145 5.650 9.471 8.530 7,722 10 8.983 8.111 7.360 7.139 6.495 5.938 10.368 9.7879.253 8.306 7.887 11 8.760 7.536 6.814 6.194 11.255 10.575 9.954 12 9.385 8.863 8.384 12.134 11.348 10.635 9.986 7.904 7.103 6.424 13 9.394 8.853 13.003 12.106 11.296 10.563 9.898 8.244 7.367 6.628 14 9.295 13.865 12.84911.938 11.118 10.380 9.712 8.559 7.606 6.811 15 14.718 13.578 12.561 11.652 10.838 10.056 8.851 7.824 6.974 16 1% 2% 3% 4% 5% 6% 8% 10% 12% n st LO CO