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Zephyr Farming Pty Ltd is considering the purchase of a wind turbine generator in order to generate electricity and to reduce the electricity costs for their offices, which are located in Toowoomba. Currently the business uses 60,000 kilowatt hours (kWh) per quarter (3 months) at an average cost of $0.30 per kwh, supplied by the local coal fired power station. The current required rate of return used to evaluate projects is 6%, with a required payback period of 3 years.
The Queensland government started a scheme to provide an incentive for business to use alternative sources of renewable power. The incentives are 5% immediate reimbursement of the purchase and installation costs. This reimbursement can be paid to the supplier providing and installing the equipment. Therefore, the net cash flow from Zephyr Farming Pty Ltd is the purchase cost plus the installation cost less the 5% incentive back from government to offset these costs.
Project details:
Cost of wind turbine generator          $6,000
Cost to install turbine and generator (by supplier)        $450
Expected cash incentive back from government to offset cost of the panels paid immediately the wind turbine generator installed           5% of total costs
Turbine expected (on average) generated kilowatt              300 hours per month
Generator’s expected life (in years)                   15 years

requirements:

6. Comment on two limitations with the payback period method after considering your answers to 2 and 4 above (2 marks)
7. What qualitative, non-financial factors (not included in the quantitative analysis) would influence your opinion on whether the investment in the wind generator should proceed. (2 marks)
8. As the Chief Operating Officer (COO) of Zephyr Farming Pty Ltd, provide [in an internal informal report email] your recommendation(s) about what to implement [use your answers in 1 to 7 to support your recommendation(s)]. You report will be sent directly to Hoang Binh, who is the Chief Financial Officer (CFO). (3 marks)

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