June 15, 2014
June 15, 2014
June 18, 2014
24.262.1 - 24.262.11
Case Study Application of After Tax Analysis to a Renewable Energy Project A major success factor for renewable energy projects is economic performance. An aftertax analysis (ATA) is an appropriate way to evaluate the economics of implementing renewableenergy projects because it considers the inherent taxes from a project’s beginning to its end. TheATA incorporates pedagogical knowledge conveyed in engineering economics courses such asthe time value of money, the modified accelerated cost recovery system of accelerateddepreciation factor and associated depreciation values, the debt/equity ratio, cash flow, netpresent value and breakeven point, internal rate of return and minimum acceptable rate of return. For renewable energy projects, the government is essentially a partner in capitalinvestments because they provide financial assistance in the form of tax breaks and productiontax credits. Capital expenditures become less burdensome due to depreciation rates, tax rates,investment tax credits and capital gains taxes. Also, the project profitability varies depending onthe amount borrowed, this is financial leverage. ATA is used to determine the point at whichfinancial leverage is optimized. Upon completion of the ATA, a sensitivity analysis willdetermine how variation in the defined factors will affect the internal rate of return. Inconclusion, one great benefit of the ATA is the ability to adjust the financing design during theplanning stage by manipulating the parameters; and ultimately the most profitable solution canbe implemented. This paper presents a case study depicting the cost of construction, implementation andoperation of a commercial wind farm with the application of life cycle costing using ATA. Thistechnique defines the life cycle cost for the entire operation: from financing the project, topurchasing the equipment, and the project revenue. While this approach requires extensiveresearch to determine the parallel costs and revenue rates, the results from conducting an ATAwith life cycle costs allows for a solid final decision based on actual figures and predefinedeconomic criteria. The results from this analysis proved that using financial leverage and takingadvantage of production tax credits and power purchase agreements, a commercial wind farm isan acceptable and profitable venture.References: 1. Bonilla, O., & Merino, D. N. (2010). Economics of a Hydrogen Bus Transportation System: Case Study Using an After Tax Analysis Model. Engineering Management Journal, 22(3), 34-44. 2. Bonilla, Oscar, Donald N. Merino, Michael Raftery, Tamara Wainer, and Rashmi Jain. (2012) "A Systems Model for Commercializing Emerging Technology: Wave Energy Farm System (WEFS) Case Study." International Journal of Industrial and Systems Engineering 3. Bastian, N. D., & Trainor, T. E. (2010). Going Green at West Point: Is it Economically Beneficial? A Cost-Benefit Analysis of Installing a Wind Farm at the United States Military Academy. Engineering Management Journal, 22(3), 12-20. 4. Rana, Vishwajeet. (2011). The Energy Economics of Financial Structuring for Renewable Energy Projects. (Doctoral Dissertation). Retrieved from ProQuest. (3467236). 5. Wang, H. S., Spohn, K. M., Piccard, L., & Yao, L. (2010). Feasibility Study of Wind Power Generation System at Arctic Valley. Engineering Management Journal, 22(3), 21-33.
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