The wind farm can produce 2025 MWhs (megawatt hours) over the remainder of its productive life. Specifically you can produce 25 MWh today and then another 2000 MWhs one year from today (we’re following the end of year convention). Alternatively the wind farm can be shutdown at no cost today if you decide that is the best choice. The marginal cost of operating the wind farm is expected to be $40 per MWh if you produce today; that price will also hold if you continue to operate over the next year. You can sell the power generated today (the spot price) at $30 per MWh; further the forward price for power delivered one year from today is $32 per MWh. The risk-free rate is 5%.
Part a) Calculate the net present value of the cash flows if you produce all 2025 MWhs of power; in other words, assume you produce 25 MWhs today and 2000 MWhs one year from today. Based on this calculation determine if the company should shut down the wind farm down today or operate it for the remainder of its productive life.