Question

Tipmont REMC is considering whether to install wind turbines around Romney, Indiana (a few miles south of Lafayette). However, due to some complaints from initial homeowners, they only decide to install 8 to begin with, as a trial run. The price of installing each turbine is $80,000. The new turbines will allow them to generate 900,000 kW-h per year for free, in terms of variable costs; they currently pay for electricity at a rate of $0.10 per kW-h. What is the breakeven point in terms of the number of years that the turbines need to work in order for them to recoup their investment?

Answer 1

The turbines will have to work for 7.11 years to recoup the investment

Step-by-step explanation:

The payback period is the estimated length of time in years it takes

the net cash inflow from a project to equate and recoup the net cash the initial cost

Where a project is expected to generate a series of equal annual net cash inflow, the payback period can be calculated as:

Payback period =The initial invest /Net cash inflow per year

The cost of the investment = 8 × 80,000. = 640,000

Annual savings in cost = $0.10 × 900,000 = $90,000 per annum

Payback period = 640,000/90,000

= 7.11 years

The turbines will have to work for 7.11 years to recoup the investment