Question

1-20 years

5 turbines

Average hourly power output per turbine: 0.31 MWh

Operational days per year 363.00 days

Capital expenditure per turbine $3,000,000.00

Life 20.00 years (Turbines will be dismantled at end of 20 years if not overhauling.)

Salvage per turbine $200,000.00 (Market value at end of 20 years.)

Expected price per MWh of power in first year $80.00 (Price per MWh is then expected to increase at inflation.)

Expected price per MWh of renewable energy certificate in first year $70.00 (For each MWh generated by the wind turbines, SAI will be issued with a renewable energy certificate which it can sell to electricity retailers who have sold renewable energy to customers. Price of certificates is then expected to increase at inflation.)

Expected operating expenses per turbine in first year $100,000.00 (Annual operating expenses then expected to increase by inflation.)

Depreciation method- Straight Line

Working capital- $0 (Given service agreements, there is no working capital requirement)

Inflation Rate (p.a.) 0.026

Tax Rate 0.30 (Tax payment occurs at the same year as income)

Discount Rate 0.10

Additional Information to extend life to 40 years

Overhaul cost at end of 20th year per turbine $1,500,000.00

Life of overhaul 20.00 years

Salvage $0

Depreciation method of overhaul cost Straight Line (Overhaul expense is capitalised and then depreciated over extended life.)

Treatment of existing capital expenditure (e.g. original outlay) $0 (Remaining book value of original capital expenditure written down to zero in year 20.)

Calculate EBITDA, depreciation and gain/loss of sale for the extended life

Answer 1

EBITDA Calculations

Assumptions relevant for EBITDA calculation:

EBITDA calculation for 1st 20 Years:

EBITDA calculation only for extended Life [Years 21- 40]:

Depreciation Calculations

Concept 1- The book value of each turbine is assumed to be written down to 0 at the end of 20 Years, so irrespective of Market Value or Salvage Value, the original capital expenditure of the turbine is 100% depreciated in 20 Years or 5% per year

Concept 2 - The overhaul expenditure for each turbine is capitalised in the 20th year and then is taken to 0 by the 40th year, so again the depreciation is 100% in 20 years or 5% each year

Depreciation and Asset Value [Year 1 - 20]

Depreciation and Asset Value [Year 21 to 40]

Gain/Loss for Sale

We shall consider 2 cases here :

1) where there is no overhaul expenditure and the turbines are sold post 20 years to get salvage value of US$ 200,000 per turbine

2) Where there is capital expenditure on overhaul and then the turbines' run for another 20 years but there is no salvage value at the end of 40 years    

The Discount Factors are calculated as

Where the Discount Rate is given to be 10% and n = period of discounting (in effect the year of discounting)

So, as can be seen , the Overhaul case has a better NPV than the no overhaul case (though both are still negative) and it makes sense to spend the capex on overhauling the turbines rather than selling them at the end of 20 Years.