Windmill problem

            XYZ Limited, a highly profitable company, is engaged in the manufacture of power intensive products. As part of its diversification plans, the company proposes to put up a Windmill to generate electricity. The details of the scheme are as follows:

(A)       Cost of the Windmill                                                                                     — Rs. 300 lakhs

(B)       Cost of Land                                                                                                    — Rs. 15 lakhs

 (C)      Subsidy from State Government to be received at the end of              — Rs. 15 lakhs

             first year of installation

(D)  Cost of electricity will be Rs. 2.25 per unit in year 1 which will increase by Rs. 0.25 per unit every year till year 7.After that it will increase by Rs. 0.50 per unit.

(E)  Maintennce cos will be Rs. 4 lakhs in year 1 and the same will increase by Rs. 2 lakhs every year.

(F)  Estimated life 10 years. (7)  Cost of capital 15%.

(G)  Residual value of Windmill will be nil. However land value will go up to Rs. 60 lakhs, at the end of year 10.

(H)  Depreciation will be 10% of the cost of the Windmill in year 1 and the same will be allowed for tax purposes.

(I)  As Windmills are expected to work based on wind velocity, the efficiency is expected to be an average 30%. Gross electricity generates at this level will be 25 lakh units per annum. 4% of this electricity generated will be committed free to the State Electricity Board as per the agreement.

(J)  Tax rate 50%.

From the above information you are required to calculate the net present value.(ignore tax on capital profits).For your exercise ,use the following discount factor for year 1 to 10:

Year	1	2	3	4	5	6	7	8	9	1 0
Discount Factors	0.87	0.76	0.66	0.57	0.50	0.43	0.38	0.33	0.28	0.25

 

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