Question

(c) A wind turbine construction company bids for a fixed-price order from local government to install 70 wind turbine towers in the far coastal area.  They project the works with their increasing capacity in the coming 6 years in the following table.

Period	Number of installations
1	10
2	11
3	12
4	13
5	14
6	10

Assume the investment costs them $3,008,000 in now.  Once installed, each turbine can earn $100,000.  They assume the average inflation rate will be 4% over these 6 years.  What would be the present worth of this project?  Is it worth to invest?

Answer 1

Solution

Given Initial investment= 3008000

Now it is given each turbine can earn 100000/year (Assuming that earning given is for each year)

           

Now Present worth=Present value of all cash inflows – Initial investment

Present value of a cash flow= Cash flow/ (1+r)^n

Where r= rate of interest (In this case rate of inflation) =4%

n= year for which cash flow being calculated

For example cash flow for year 1 = Number of turbines*100000=1000000

Therefore Present value year 1= 1000000/1.04^1= 961538.46

Similarly in year 2 now 11 more turbines have been installed therefore total working turbines in year 2 =10+11=21

Revenue for 21 turbines=2100000

Present value year 2= 2100000/1.04^2

= 1941568.05

Similary calculating values for other year we get below data

Year	Installation done	Total turbines installed till that year(a)	Revenue=100000*number of turbines installed till that year(a)	Present value of revenues@ 4%
1	10	10	1000000	961538.46
2	11	21	2100000	1941568.05
3	12	33	3300000	2933687.98
4	13	46	4600000	3932099.28
5	14	60	6000000	4931562.64
6	10	70	7000000	5532201.68
			Total present values	20232658.09

Therefore sum of Present values for cash flow for all years= 20232658.09

Present worth of project = sum of Present values for cash flow for all years- Initial investment

=20232658.09-3008000

=17224658.09

Yes it is worth investing in the project as the present worth is good and project is giving good return on initial investment