how would this lower capacity factor alter project npv 411516

In December 2005 Mid American Energy brought online one of the largest wind farms in the world. It cost an estimated $386 million and the 257 turbines have a total capacity of 360.5 megawatts (mW). Wind speeds fluctuate and most wind farms are expected to operate at an average of only 35% of their rated capacity. In this case, at an electricity price of $55 per megawatt hour (mWh), the project will produce revenues in the first year of $60.8 million (i.e., .35 × 8,760 hours × 360.5 mW × $55 per mWh). A reasonable estimate of maintenance and other costs is about $18.9 million in the first year of operation. Thereafter, revenues and costs should increase with inflation by around 3% a year.

Conventional power stations can be depreciated using 20 year MACRS, and their profits are taxed at 35%. Suppose that the project will last 20 years and the cost of capital is 12%. To encourage renewable energy sources, the government offers several tax breaks for wind farms.

a. How large a tax break (if any) was needed to make Mid American’s investment a positive NPV venture?

b. Some wind farm operators assume a capacity factor of 30% rather than 35%. How would this lower capacity factor alter project NPV?