Syracuse University

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

- The unit's capacity would be 1 megawatt (MW), or 1,000 kilowatts (kW).
- The cost of the turbine would be $1,000 per kW of capacity. Be sure to note that the price is per kilowatt, not per megawatt.
- The utility expects the unit to last for 20 years.
- Maintenance on the unit will cost $20,000 each year.
- The unit's electricity can be sold for $0.07 per kWh.
- The utility uses an interest rate of 15% when doing present value calculations.

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.

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URL: https://wilcoxen.maxwell.insightworks.com/pages/2728.html

Peter J Wilcoxen, The Maxwell School, Syracuse University

Revised 06/01/2008

URL: https://wilcoxen.maxwell.insightworks.com/pages/2728.html

Peter J Wilcoxen, The Maxwell School, Syracuse University

Revised 06/01/2008