Wind Power Inc builds and operates wind farms that

generate #2909
Wind Power Inc. builds and operates wind farms that generate electrical power using wind
turbines. The firm has wind farms throughout the Southwest, including Texas, New Mexico, and
Oklahoma. In spring 2015, the firm was considering an investment in a new monitoring system
that costs $ 6 million per wind farm to install. The new system is expected to contribute to firm
EBITDA via annual savings of $ 4.25 million in year 1, $ 2.9 million in year 2, and $ 1 million in
year 3. Wind Power’s CFO is interested in investing in the new system but is concerned that
the savings from the system are such that the immediate impact of the project is so accretive to
the firm’s earnings that the individual unit managers will adopt the investment even though it
may not be expected to earn a positive NPV. The firm has just moved to an economic profit–
based bonus system, and the CFO fears that the project may also make the individual economic
profits improve dramatically in the short term— a development that would provide an added
incentive for the wind-farm managers to take on the project. a. Calculate the project’s expected
NPV and IRR, assuming that the cost of capital for the project is 15%, the firm faces a 30%
marginal tax rate, it uses straight-line depreciation for the new investment over a three-year
project life, and it has a zero salvage value. b. Calculate the annual economic profits for the
investment for years 1 through 3. What is the present value of the annual economic profit
measures discounted using the project’s cost of capital? What potential problems do you see
for the project? c. Calculate the economic depreciation for the project and use it to calculate a
revised economic profit measure following the procedure laid out in Table 7-8. What is the
present value of all the revised economic profit measures when discounted using the project’s
cost of capital? ( Hint: First, revise the initial NOPAT estimate from your answer to Exercise
7-3a by subtracting the economic depreciation estimate from project free cash flow calculated in
Exercise 7-3a. Next, calculate the capital charge for each year based on invested capital less
economic depreciation.) d. Using your analysis in answering Exercises 7-3b and c, calculate the
return on in-vested capital (ROIC) for years 1 through 3 as the ratio of NOPAT for year t to in-
vested capital for year t -1. Compare the two sets of calculations and discuss how the use of
economic depreciation affects the ROIC estimate for the project.View Solution:
Wind Power Inc builds and operates wind farms that generate

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