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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Sustainable energy capital investment analysis

Central Plains Power Company is considering an investment in wind farm technology to replace natural gas-generating capacity. Initial installation cost of a wind turbine is expected to be $1,200 per kilowatt-hour of capacity. The wind turbine has a capacity of generating 2 megawatts per hour. A kilowatt-hour is 1,000 watts generated per hour, and a megawatt hour is 1,000 kilowatts generated per hour.

Annual operating information related to the wind turbine project was developed as follows:

Operating cost per wind turbine megawatt hour $10
Variable operating, fuel, and maintenance costs of natural gas per megawatt hour $95
Wind turbine operating days per year 90
  1. a. Determine the initial investment cost of the wind turbine.
  2. b. Determine the annual cost savings from the wind turbine in replacing natural gas generation. Round to the nearest dollar.
  3. c. Determine the net present value of the project assuming a 15-year life and 12% minimum rate of return (use the present value tables in Appendix A). Round to the nearest dollar.

a.

To determine

Capital investment for sustainability:

Capital investment for sustainability refers to the investment which is earned maximum profit while attempting to preserve the environment, economy and future needs. There are some objectives in the capital investment sustainability as follows:

  • Minimize resource waste and environmental degradation,
  • Develop new sustainable markets,
  • Reduce litigation risks, and
  • Maintain an attractive and safe working environment.

Net present value method:

Net present value method is the method which is used to compare the initial cash outflow of investment with the present value of its cash inflows. In the net present value, the interest rate is determined by the business, based on the net income from the investment, and it is also called as the discounted cash flow method.

To determine: The initial investment cost of the wind turbine.

Explanation

Calculation for the initial investment cost of the wind turbine is as follows:

InitialInvestmentCostoftheWindTurbine}=(TurbineInvestmentCostperkilowatthour)×(Capacityofwind turbine

(b)

To determine
The annual cost savings from the wind turbine.

(c)

To determine
The net present value of the project assuming a 15 year life and 12% minimum rate of return.

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