Chapter 11, Problem 1ADM

(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.

The initial investment cost of the wind turbine.

Explanation of Solution

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

$\begin{array}{c}\begin{array}{l}\text{Initial}\text{Investment}\\ \text{Cost}\text{of}\text{}\text{the}\text{Wind}\\ \text{Turbine}\end{array}\}\text{=}\left(\begin{array}{l}\text{Turbine}\text{Investment}\\ \text{Cost}\text{per}\text{kilowatt}\text{hour}\end{array}\right)\text{×}\left(\begin{array}{l}\text{Capacity}\text{of}\text{wind }\\ \text{turbine}\text{to generate }\\ \text{Kilowatt per}\text{hour }\left(1\right)\end{array}\right)\\ \text{=}\text{\$1,200}\text{×}\text{2,000}\text{kwh}\\ \text{=}\text{\$2,400,000}\end{array}$

For the capacity of wind turbine to generate kilowatt per hour refer the following working note.

Working Note:

Capacity of wind turbine = 2 mega watt hour

$\begin{array}{c}\text{1 MegaWattHour}\text{=}\text{1,000}\text{KiloWattHour}\\ \text{2MegaWattHour}\text{=}\left(\text{2×}\text{1,000}\right)\text{KiloWattHour}\\ \text{=}\text{2,000}\text{KiloWattHour}\end{array}$ (1)

Conclusion

Hence, the initial investment cost of the wind turbine is $2,400,000.

(b)

To determine

The annual cost savings from the wind turbine.

Explanation of Solution

Calculation of the annual cost savings from the wind turbine is as follows:

$\begin{array}{c}\begin{array}{l}\text{Annual}\text{Cost}\text{Savings }\\ \text{from the}\text{Wind}\text{Turbine}\end{array}\}\text{=}\left(\begin{array}{l}\text{Wind}\text{Turbine megawatt}\\ \text{hour}\text{generated}\text{per}\text{year}\left(\text{1}\right)\end{array}\right)\text{×}\left(\begin{array}{l}\text{Megawatt}\text{hour}\\ \text{cost}\text{savings}\text{using}\\ \text{WindTurbine}\left(\text{2}\right)\end{array}\right)\\ \text{=}\text{4,320}\text{mwh}\text{×}\text{\$85}\\ \text{=}\text{\$367,200}\end{array}$

For the wind turbine megawatt hour generated per year and megawatt hour cost savings using wind turbine refer the following working notes.

Working Note:

Capacity of wind turbine = 2 mega watt hour

Operating days per year = 90 days

Operating hours per day = 24

Calculation of Wind turbine generated per year.

$\begin{array}{c}\begin{array}{l}\text{Calculation}\text{of}\\ \text{WindTurbine}\\ \text{generated}\text{per}\text{year}\end{array}\}\text{=}\left(\begin{array}{l}\text{Capacity}\text{of}\\ \text{wind}\text{turbine}\end{array}\right)\text{×}\left(\begin{array}{l}\text{Operating}\\ \text{days}\text{per}\text{year}\end{array}\right)\text{×}\left(\begin{array}{l}\text{Operating}\\ \text{days}\text{per}\text{hour}\end{array}\right)\\ \text{=}\text{2mwh}\text{×}\text{90}\text{days}\text{×}\text{24}\text{hours}\\ \text{=}\text{4,320 mwh}\end{array}$ (1)

Calculation of megawatt hour cost savings using wind turbine:

$\begin{array}{c}\begin{array}{l}\text{Megawatt}\text{hour}\\ \text{cost}\text{savings}\text{using}\\ \text{wind}\text{turbine}\end{array}\}\text{=}\left(\begin{array}{l}\text{Variable}\text{operating}\text{cost}\text{per}\\ \text{megawatt}\text{hour}\text{:natural}\text{gas}\end{array}\right)\text{-}\left(\begin{array}{l}\text{Operating}\text{cost}\text{per}\\ \text{megawatt}\text{hour}\text{:}\text{wind}\text{turbine}\end{array}\right)\\ \text{=\$95}\text{-}\text{\$10}\\ \text{=}\text{\$85}\end{array}$ (2)

Conclusion

Hence the annual cost savings from the wind turbine is $367,200.

(c)

To determine

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

Explanation of Solution

Calculation of the net present value of the project is as follows:

CP Power Company
Net Present Value of the Project
Particulars		Amount In $ (except present value of annuity)
	Annual net cash flow	367,200
	Present value of annuity of $1 at 12% for 15 years (Appendix A)	6.81086
	Present Value of annual net cash flow	2,500,948
Less:	Amount to be invested	-2,400,000
	Annual net cash flow	100,948

Table (1)

Conclusion

Hence, the net present value of the project is $100,948.