Choice and Cost Benefit Analysis > Present Value

Wind Turbine

An electric utility is considering building a new wind turbine for power generation. It has the following information:

The utility is not sure how much power the turbine will generate during a typical year. In the language of the industry, it is uncertain about the turbine's "capacity factor" -- the ratio of the turbine's actual annual output to its maximum capacity. It would like to know the net present value of the turbine under three assumptions about the capacity factor: 20%, 25% and 30%, a range typical of wind turbines.

In doing the calculations, you should assume that all construction costs are paid in year 0 and the turbine operates from year 1 to year 20 (that is, maintenance costs and revenue apply in years 1-20). Also, you may assume that all prices and costs will be constant over the life of the turbine.

Solution

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Peter J Wilcoxen, The Maxwell School, Syracuse University
Revised 06/01/2008