Question

A municipality is considering an investment in a small renewable energy power plant with the following parameters. The cost is $360,000, and the output averages 50 kW year-round. The price paid for electricity at the plant gate is $0.039/kWh. The investment is to be evaluated over a 25-year time horizon, and the expected salvage value at the end of the project is $20,000. The MARR is 6%.Calculate the NPV of this investment. Is it financially attractive? Calculate the operating credit per kWh which the government would need to give to the investment in order to make it break even financially. Express your answer to the nearest 1/1000th of dollars

Answer 1

1. this project is not financially attractive because the NPV is negative (-$136,974.74)
2. operating credit per kWh = $0.0245

Step-by-step explanation:

initial investment = $360,000

yearly cash flows 1 - 24 = 50 x $0.039 x 24 hours x 365 days = $17,082

yearly cash flow year 25 = $17,082 + $20,000 = $37,082

using a financial calculator, the present value of the yearly cash flows = $223,025.26

this project's NPV = -$360,000 + $223,025.26 = -$136,974.74

in order for this project to be profitable, NCFs should be:

$360,000 - ($20,000 / 1.06²⁵) = $355,340.03

annual earnings = $355,340.03 / 12.783 (PV annuity factor, 6%, 25 periods) = $27,797.86

total kWh = 50 x 24 x 365 = 438,000

$27,797.86 / 438,000 = $0.063465 per kWh

operating credit = $0.063465 - $0.039 = $0.0245