In December 2005, MidAmerican Energy brought the largest wind farm in the world online. It cost $386 million and the wind farm had a capacity of 360.5 megawatts (mW). Winds are unpredictable and most wind farms assume they operate at 35% capacity. At a price of electricity of $55 per megawatt, the farm will produce $60.8 million (.35 x 8,760 hours x360.5 mW x $55 per mW hour). The estimated maintenance costs in the first year are $18.9 million and remain at that level for the life of the project. Conventional power plants can be depreciated at a 20-year straight-line deprecation rate and their profits are taxed at 35%. Assume the project has a projected life of 20 years and the cost of capital is 12%. To encourage renewable energy, the government is considering tax breaks for wind farms.
a. How large of a tax break is needed to make this wind farm a net-positive NPV investment?
b. What if wind patterns change and the operating capacity ends up being 30%, not the estimated 35%?