Question

In 2014 the Brookings institute published a working paper (#73) authored by Dr Charles R. Frank Jr titled “The net benefits of low and no-carbon electricity technologies” In this paper Dr. Frank makes a benefit to cost analysis of alternative ways to “traditional power generating power” and compare them to alternative sources such as solar and wind technologies.

Looking at the wind power, the initial cost of establishing a power plant is estimated to be $230,645 per megawatt with subsequent incremental costs of $39,550 (operation and maintenance). Suppose that the benefits are estimated to be at $62,700 per megawatt per year. Dr Frank estimated that the discount rate at 7.5% (The opportunity cost of money) with a current inflation rate of 2.4%. The Table below will help you visualize your data. The same tables are located in the Excel file

Year	Time	Nominal Incremental Cost	Real Dollars/ Future Value (Adjusted for Inflation)	Discount Factor	Present Value
2018	0				$230,645
2019	1	$39,550
2020	2	$39,550
2021	3	$39,550
2022	4	$39,550
				Total Cost (Present Value)

Year	Time	Nominal Incremental Benefit	Real Dollars / Future Value (Adjusted for Inflation)	Discount Factor	Present Value
2019	1	$62,700
2020	2	$62,700
2021	3	$62,700
2022	4	$62,700
				Total Benefits (Present Value)
				Net Present Value
				Benefit to Cost Ratio

Based on this information

1.- Adjust benefits and cost to 2018 real dollars (inflation) (Example 2019 = time is 1 or 2018=0)

2.- Adjust for the opportunity cost of money taking into account a discount rate of 7.5% for costs and benefits

3.- Calculate the Net present value to the society

4.- Calculate the benefit to cost ratio and interpret both results Explain based on these 2 metrics if the a wind project will be feasible or not.

Answer 1

Year	Time	Nominal Incremental Cost	Real Dollars/	Discount Factor	Present Value
			Future Value
			(Adjusted for Inflation)
2018	0				$230,645
2019	1	$39,550	40499.2	0.930232558	37673.67
2020	2	$39,550	41471.18	0.865332612	35886.36
2021	3	$39,550	42466.49	0.80496057	34183.85
2022	4	$39,550	43485.68	0.74880053	32562.10
				Total Cost (Present Value)	370950.99
Year	Time	Nominal Incremental Benefit	Real Dollars / Future Value (Adjusted for Inflation)	Discount Factor	Present Value
2019	1	$62,700	64204.80	0.930232558	59725.40
2020	2	$62,700	65745.72	0.865332612	56891.91
2021	3	$62,700	67323.61	0.80496057	54192.85
2022	4	$62,700	68939.38	0.74880053	51621.84
				Total Benefits (Present Value)	222432.00
				Net Present Value	($148,519)
				Benefit to Cost Ratio	0.60

Net Present Value to the society is negative, it means that the project is eroding the value of intial investment and this project is not financially feasible.

Benefit to cost ratio is less than 1, it means project's benefits are not sufficient to cover the costs of the project & project is not recovering it's initial cost. Hence, project is not feasible financially.