SBM3307 Project Development and Optimisation

Introduction

Slight wind on the farm: A Capital budgeting case study

The attentiveness in using renewable energy has been on the rise in recent years. Growing large numbers of federal and state inducement supporting wind energy schemes seems sensible, to counterpoise electricity overheads on farms. The use of wind energy as a renewable energy source has been increasing fast, with the noticeable tendency being the utility-scale connections, having increased annually by about thirty-nine percent during the last five years following the AWEA(Harsh, Hamilton and Wittenberg, 2010, P.202).The case study looks into the finances of using the systems on a farmhouse in Michigan, which are becoming widespread alternatives for granges in the countryside with adequate assets due to the new tax inducements by the AWEA.

For instance, farms that mostly rip benefits from the use of wind energy are those whose energy demands are high or need electrical energy at an off-network location. Greenhouses, dairy farms processing raw products are perfect contenders for systems of wind energy(Harsh et al 2010, P.205). Also, the farm need to possess a decent wind resource, initiated by the climate besides the geographical location. Wind energy is regarded as sporadic, with stronger winds blowing during the winter and in the fall. This makes the farms that use vast amounts of electricity during those seasons rip great benefits from installing wind energy systems.  

Incentives in support of small wind energy systems

In recent years, strategies backing up small wind energy setting up has increased significantly. Wind energy installations for businesses and farms have been made attractive by the new federal tax incentives and the upgraded state-level policies. The incentives initially presented and prolonged exist for lesser wind turbines of 100kW or lower. Wind turbine resources are allowed to depreciate in six years rather than in twenty years (Sarwary, 2019, P.98). The speeded-up devaluation upsurges the rate of revenues to the wind energy systems investments, being the initial expenditure and the turbine procurement.

Policies impacts the degree of implementation as well as financial yields of renewable energy connection. Generally, the power obtained from small wind turbines is used to offset the individuals' cost of electricity through net metering, which subtracts the complete selling worth of the power produced.  

The capital budgeting process

Identification and evaluation of potential investment opportunities

The process starts by exploring the available opportunities and identifying any underlying market trends before choosing the specific investment project to undertake. For the 2008 case study in Michigan, the electricity expenses are about 10.76 cents for every kilowatt-hour. The cost of electricity has since been rising to nearly 20 percent(Harsh et al 2010, P.209). According to the case study, there seem to lack contemporary education of embracing small wind energy installations in agriculture and found that the wind system was a financially desirable expertise for tons of about 100-1000 watts.

Gathering of the investment proposals

After identifying the available investment opportunities, the subsequent process in the capital budgeting process is to gather all the available investment proposals. Although the finances of small wind systems have increased in latest years, a research conducted stated that a small wind arcade is predominantly run by the availability of auspicious policies, including allowances, tax credits, and credit plans with low interest, therefore all the proposals are brought together.

Decision-making process in capital budgeting

A decision is made regarding what investment is needed to be made from the available investment opportunities. After analysis using the SWOT technique, it was indicated that most federations would need a BTC lower with two dollars each watt to offer an eight percent yield for the projected twenty-year system duration (Malenko, 2019, P.1750). The states that provided the highest yields had both the highest electric power costs and cash incentives to offset the costs of installations. The analysis of the study is expected to be involved in a better decision-making process.

Capital budget preparations and appropriations

This step involves the investments expenditures into different values. The current installation cost for the small wind turbines per kilowatt ranges from four dollars to six dollars. Since Michigan have no state incentive, the results were reportedly falling below the BTC threshold(Harsh et al 2010, P.210). The small wind systems' finances rely on payback calculations to access the monetary practicality of the methods. Evaluation of small wind systems in South Dakota, Minnesota, and California was conducted, and the payback periods were found to be twenty-three, nine, and seven years, respectively.

Implementation

After capital budget preparations, then the project is put into action. The wind energy system was planned as a basis of irrigation pumping using a discounted cash flow method. Using a ten percent discount rate, the stand-alone wind system was a sensible alternate to diesel and liquid gas in different power value situations. After the identification, the project is implemented efficiently.

Review of performance

This involves the last step in capital budgeting and involves comparing the definite results and the expected results when the project has steadied. The case study of the different wind turbine sizes under the varying speeds of wind and policy circumstances shows that several aspects need be deliberated when deciding which economic investment is preferable (Shaban, Al-Zubi and Abdallah, 2017, P.178). The base case shows that the wind energy investment is not a good venture for farm business deprived of government subsidies.

Factors considered during the capital budgeting process

With the numerous technologies of renewable energy, the questions of whether it is a good investment depending on the variables such as the present demand of energy and the outlays associated with electricity, wind resource, the obtainability of strategies supporting renewable energy, and the installation expenses as well as a selection of tools (Welde and Odeck, 2017, P.620). Also is how the decision of the farmer affected the choice of using small wind turbine technology.

 Factors that were considered during the capital budgeting process included;

• True net metering
• Good wind resources
• REAP programs
• Turbine size
• Federal incentives
• Installation costs
  
  

For the case study, no managerial complications occurred, using managerial considerations of an analytical model that comprises a value-generated module and the investment module. The analytical model is used to establish the value of electric power produced from a wind turbine at a specific location. On the other hand, it utilizes the capital budgeting in evaluation of financial consequencies of making investments in small  wind turbines.  

According to the case study of a dairy farmhouse situated in the west part of Michigan, a modest-size action with 260 milking cows including substitutes, it is deliberated to be in a noble wind area and nominated to take part in the Michigan Anemometer Loan Program(Harsh et al 2010, P.210). After analysis of the case study, the farm owner has an investment return benchmark of ten percent. With good wind resources, accurate net metering, and no federal incentives, earning the desired ten percent returns would require an increase in the electricity prices; therefore, the wind turbine would be a meagre venture. For the second setting involving no REAP program, there is a need to encourage small wind turbines to obtain the desired ten percent returns.

The third scenario with insufficient wind resources indicates that devising decent wind resources while endowing in minor wind turbines is essential. Similarly, approximating the wind speed by using close wind measurements such as airfield statistics might influence incorrect analysis. Large turbines change the finances substantially. The costs of repairs and are higher since there are additional costs of interconnection and regulation expenses for more significant, improved net-metered installations. The lower capacity factor for larger turbines subsequently caused the production of poor results.

There is improved economics but lower returns for the owner for the case with raised accurate metering to 50 kW. The wind speeds for the case are not an adequate amount to enable the production capability of a 50 kW turbine. Lower wind speed results to larger turbines being a meager investment option. It works best with high wind speeds.

Findings and recommendations

According to the case study, wind energy systems is not a good investment choice with no state subsidizations.

With the existing wind energy system fitting charges, the electrical energy proportions would require additional amount in Michigan to ensure wind energy a good venture.

The wind resource as well as satisfactory strategies like the REAP program are significant in yielding more returns on investment of a wind energy turbine.

Although farms can use the more significant proportion of power produced by the wind turbine, wind speed is not ample to make bigger turbine a meagre investment option, in addition to REAP benefaction loan besides advanced accurate net metering of 50kw.

To ensure wind energy is a reliable venture for farms, variables such as;

• worthy wind source
• adequate electricity call at a moderately great price
  
  

The absence of any of the above factors will make the wind turbine a poor investment choice.

Reference List

Harsh, S., Hamilton, L. and Wittenberg, E., 2010. Small wind on the farm: a capital budgeting case study. Agricultural Finance Review, 70(2), pp.201-213.

Malenko, A., 2019. Optimal dynamic capital budgeting. The Review of Economic Studies, 86(4), pp.1747-1778.

Mubashar, A. and Tariq, Y.B., 2019. Capital budgeting decision-making practices: evidence from Pakistan. Journal of Advances in Management Research.

Sarwary, Z., 2019. Capital budgeting techniques in SMEs: A literature review. Journal of Accounting and Finance, 19(3), pp.97-114.

Shaban, O.S., Al-Zubi, Z. and Abdallah, A.A., 2017. The extent of using capital budgeting techniques in evaluating manager’s investments projects decisions (a case study on Jordanian industrial companies). International Journal of Economics and Finance, 9(12), pp.175-179.

Welde, M. and Odeck, J., 2017. Cost escalations in the front-end of projects–empirical evidence from Norwegian road projects. Transport Reviews, 37(5), pp.612-630.

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