Question: Recalculate the NPV of the tax shield provided by the wind turbine given the following?changes:
?? Straight line depreciation over 4 years?(25% of starting book value is depreciated in each of years?1-4).
?? Tax rate of?45%
?? Discount Rate of?9%
IMA EDUCATIONAL Case Journal 0456 Sludy The Association of Accountants and Financial Professionals in Business ISSN 1940-204X A Green Winter: The Case of Proposed Jiminy Peak Mountain Resort Wind Turbine Joke B. MacArmr, 35.19., FCCA Home; L. Barton, P&.D., CPA Uniwrsr'zjy ofNaml Florida INTRODUCHON Brian Fairbank. president and CEO of Jiminy Peak Mountain Resort, is worried about energy costs. Primarily a ski resort, Jiminy 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, Jiminy Peak had tried to operate as efciently as possible to minimize its electricity consumption. As examples, 1,800 new uorescent bulbs were installed in the lodge, replacing incandescent bulbs; high-efciency 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 convened to zero-energy gravity-feed. Jiminy Peak was even a test site for the development of revolutionary new high-efciency \"guns" for the snowmaking machines. This new snowmaking technology uses 4-0 percent less electricity than the older version. In the 1990s, the resort won an energy conservation recognition award from Massachusetts Electric for saving over one million kWh of electricity from its improvements in snowmaking. lighting, and elsewhere. Um'omt'zy ofNom F bride But there is only so much Jiminy Peak is able to achieve in energy conservation with its existing facilities and still offer high quality recreational services. Fairbank has realized that a more ambitious energy reduction initiative is needed, and so he and resort managers are now considering harnessing an abundant renewable green resource readily available to the mountain resort: wind power. THE WIND TURBINE PROJECT PROPOSAL Fairbank has been in the ski resort business long enough to know that the Berkshire 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 protable and \"green\" use to help stabilize the resort's electricity costs. In addition, this would be consistent with Jiminy 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. Jiminy Peak managers recognize that determining the viability of installing a wind turbine will be a complicated. specialized process, and so they have engaged Sustainable Energy Developments, Inc. (SED) of Ontario, New York. to examine the feasibility of such an investment. SED's fee is $151000. With SED's help. Jiminy Peak has already received a small grant of $15,000 from the Massachusetts Technology Collaborative to offset part of the cost of the formal feasibility study. The feasibility study is to cover the nancial, technical. social. and environmental aspects of the proposed wind turbine. You are the leader of the SED wind turbine feasibility Funding for the Renewable Energy Trust Fund comes renewable energy. Third parties have already agreed to 3. Identify and evaluate the environmental disadvantages of study team with the responsibility for preparing the from a charge on Massachusetts electric bills. purchase Jiminy Peak's credits for 10 years at $166,667 per the wind turbine project. memorandum outlining the study's findings and the team's year, and it is to be assumed in the feasibility study that sales 4. Identify and evaluate the social factors and any other recommendations for Jiminy Peak's management. of RECs will continue at this level for the remaining years of factors not already mentioned that are pertinent to the Although erecting the wind turbine on the proposed site the wind turbine's life cycle. wind turbine feasibility study. JIMINY PEAK'S HISTORY would partly hide it from the view of skiers, the local bank In addition to the RECs, the wind turbine would enable 5. Using the results from 1 through 4 above, prepare a management would be able to see the wind turbine through Jiminy Peak to benefit from $46,000 per year in renewable memo addressed to Brian Fairbank to present your Jiminy Peak opened in the Berkshire Mountains of western a window in the bank's boardroom and, perhaps alarmingly, energy production tax credits for 10 years, and it qualifies feasibility study findings and make a recommendation Massachusetts in 1948. By 2005 it was larger than any observe the bank's loan collateral when the blades were not for MACRS (Modified Accelerated Cost Recovery System) as to whether the resort should proceed with the wind other skiing and snowboarding resort in the southern New turning because of insufficient wind strength. double-declining balance depreciation for a five-year period turbine project. England states. During this time period, it evolved into a Jiminy Peak management and the SED team are with half-year depreciation in the first and last recovery 6. Discuss how ongoing environmental cost management four-season resort, offering skiing, mountain biking, and concerned about general community acceptance and support years. Also, the new turbine would enable Jiminy Peak can be used in the decision-making process to increase other outdoor sporting activities. Jiminy Peak is about 2-1/2 for the wind turbine project. The local community is very to open from two to four weeks before other area resorts value to customers and to help achieve the organizational to 3 hours' travel time from New York City and Boston and concerned with aesthetic and environmental issues. The because of the cheaper snowmaking from using wind power. goals of Jiminy Peak. is only about one hour away from Albany, New York, and proposed GE Energy wind turbine is taller than the Statue of This is estimated to generate an additional $100,000 net 7. Describe any help or practical insight that you received Springfield, Massachusetts. Liberty. Its three 123-foot blades are each longer than three cash inflow per year. Jiminy Peak management estimates from reading the case and preparing the case analysis. Through good management and sound development, school buses placed end to end. Local residents may not be that a wind turbine service contract, insurance, and other Stating that you did not receive any benefit from reading Jiminy Peak became a popular winter ski destination that happy with such a large structure being erected at the top of maintenance would cost about $75,000 annually. the case and preparing the case analysis is a valid covers 170 acres, with 45 ski and snowboard trails, three the mountain. Also, the construction materials would travel Based on discussions with Jiminy Peak management, response as long as you give at least one reason why you terrain parks, and nine lifts, including a high-speed six- noisily through the local community on trucks from the Port SED has determined that: believe this to be the case. personchairlift. Savvy marketing and attractive mountain of Albany and add to road congestion. One suggested idea facilities have enabled the resort to operate profitably, to help gain community acceptance and enthusiasm for the Jiminy Peak is subject to a 40 percent income tax rate; even in the summer. For summer sport enthusiasts, Jiminy project is to invite the public to submit names for the wind Jiminy Peak has sufficient taxable income to benefit from Peak installed the first mountain coaster on the East Coast, turbine in a "Name That Turbine" competition. A well any deductions and credits that result from the wind ABOUT IMA turbine purchase; With a worldwide network of more than 60,000 professionals, an alpine super slide, a giant swing, scenic rides, a rock publicized ceremony could be held to announce the winning climbing wall, a "euro-bungy" trampoline, hiking, and, for name and to tout the environmental and social benefits of The after-tax weighted average cost of capital is 6 percent IMA is the world's leading organization dedicated to for discounting the expected cash flows of the project; empowering accounting and finance professionals to drive children, rope adventures, mini-golf, a rope spider web, and the wind turbine. an inflatable "bouncy bounce" playground. Winter visitors The GE Energy unit would provide about one-third of The wind turbine has a 25-year useful life with no business performance. IMA provides a dynamic forum for terminal disposal value. professionals to advance their careers through Certified number about a 250,000 annually, while summer visitors Jiminy Peak's annual electrical needs. With electricity, the Management Accountant (CMA) certification, research, average about 100,000. matching of generation with consumption is an important CASE ANALYSIS QUESTIONS professional education, networking and advocacy of the issue because electricity cannot be stored for use later. With THE ECONOMICS OF HARNESSING THE WIND highest ethical and professional standards. For more sufficiently strong winds, the turbine generates power 24 As the lead member of the SED team, your responsibilities information about IMA, please visit www.imanet.org. hours a day, seven days a week, much of the time when The SED team has established that there is enough wind on Jiminy Peak does not need that level of power. Fortunately, are to supervise the completion of the feasibility study the west shoulder of Jiminy Peak's mountain to effectively with the winds on Jiminy Peak at their strongest in the of the proposed wind turbine project and to make a use a wind turbine. Significantly, the wind force on the winter, the turbine turns faster, generating more electricity. recommendation to Jiminy Peak management on whether AUTHORS NOTE: mountain is strongest during the winter, when Jiminy Peak's This phenomenon matches up nicely with the resort's higher to install a wind turbine. Address the following questions The authors thank Sandra L. Raburn and Jody Ratliff for demand for electricity is at its greatest for snowmaking, ski electricity demand for snowmaking in the winter. The to provide your analysis and opinion on whether Jiminy their research contributions and Katie Fogel of Jiminy Peak lifts, and lighting. Jiminy Peak consumes about 4.5 million wind turbine is expected to supply up to one-half of Jiminy Peak should proceed with the purchase and installation of Mountain Resort for her assistance. k Wh of electricity during the winter, which is 60 percent of Peak's winter electricity needs. Electricity generated by the wind turbine. Clearly state any assumptions used in its total annual needs. the wind turbine is expected to result in cost savings from addressing the case questions and fully reference any sources GE Energy, a unit of General Electric, is able to provide buying about 2.3 million fewer kWh per year. In addition, accessed for information. a 1.5 MW-capacity wind turbine to Jiminy Peak within a excess electricity generated by the wind turbine can be 1. Using pertinent information from the case text, prepare year at an estimated total purchase and installation cost automatically diverted to the power grid and sold for an a capital budgeting analysis of the wind turbine project on the proposed site of $3.9 million. A grant of $582,000 is estimated $161,000 each year. using the payback and net present value or internal rate available from the Renewable Energy Trust Fund n important financial component of the wind turbine of return models. administered by the Massachusetts Technology Collaborative project is the sale of renewable energy credits (RECs) to a 2. Identify and evaluate the environmental advantages of to complete the financing for the proposed wind turbine third party. There is a ready market for these credits because the wind turbine project. purchase and installation. they certify that the purchaser of the credit purchasedPANEL B: Double Declining Balance Depreciation Calculations iv ii (i - iii) (iii x 40%) vi Book Value Depreciation (i x ii) Book Value (v x PV factors) Year Beginning of Year Rate Per Year" Depreciation End of Year Tax Shield Tax Shield NPV $3,318,000 20% 40% W N 40% 40% 67% 100% Total Percentages are derived from information available ac http://www.irs.gov/publications/p946/ch04.html " Straight line depreciation is used in the 4th, 5th, and 6ch years as = or > double declining depreciation. " Using Present Value of $1.00 from Horngren, et al., 2012, 843
