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i hope i'm right here for asking. I'm a little stuck with this question any help is appreciated

You have invested 5 million Euro in a wind turbine and expect an annual return of 600,000 Euro (6000 MWh at 100 Euro/MWh). Annual operating costs are expected to be 100,000 Euro. The projected lifetime is 20 years. Assuming an interest rate of 4%, calculate the net present value of your revenues. Compare them to your initial investment and explain the meaning of your result.

Thanks in advance

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  • Just as a side note, the question as your professor has written it is poorly specified. "Revenues" and "annual return" are confusing here. "Annual return" usually means the cash flow in excess of expenses. "Revenues" (or the more common in Europe, "Turnover") means something like gross proceeds from sales. It is impractical to go through doing an NPV without accounting for the annual operating costs, which is technically what your professor has told you to do when asking for the NPV of revenues.
    – THEAO
    Feb 3, 2014 at 14:07

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This sounds a lot like a homework question. I think that the policy from the Money.SE rules is that we'll be glad to help you structure the approach, but won't give you the answer outright.

For any investment decision, there are 5 main facts you need to figure out.

  • Interest Rate

  • No. of Periods

  • Present Value

  • Cash Flows per Period

  • Future Value

Net Present Value just takes all of the 5 items and packages them into one number that answers for "Is this project profitable or not" but doesn't necessarily answer whether it is your best option for investment.

For your question, Excel would be very handy. You can put all of the different cash flow items into a spreadsheet and use the function '=NPV(rate, [cash flows]) to get the value of a stream of payments. Remember that the function that is built into Excel always takes everything back to time period 0. So if you have 3 columns of data, where column 1 is the current year, column 2 is Year 1, and column 3 is Year 2, putting the 3 cash flows into the NPV function will take your values back to Year -1.

So to do it correctly you would add the current year in nominal terms and then the NPV of the two future years of cash flow.

Or in your case, your professor has asked for you to take the already-spent 5 million €, and compare it to the NPV of the revenues.

This is a pretty classic investment scenario. There's a lot that could be said after this about whether or not it is a good idea; if it is a profitable project or not; the payback period; and why. If you show more of your work, you'll probably find that people here are more than willing to give a little more input.

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