Goladen Vineyards is a successful small winery. The owner, Gino Colucchio, is considering an additional line of business: selling wind generated electricity to the local utility. Tax law requires power utilities to purchase windmill electricity. Gino could put windmills on his current land without disturbing the grape crop. A windmill generates 200,000 kilowatt-hours annually, and the utility would pay $0.07 per kilowatt hour. There are essentially no operating costs. 

At the time Gino considered purchasing his first windmill, the cost was $100,000 per windmill. Initially, he was discouraged and almost abandoned the idea. But then he learned about two government tax credit programs that applied to investments in windmills. First, a general investment tax credit of 8 percent could be taken. That is, Goladen’s federal income taxes could be immediately reduced by 8 percent of the cost of the windmill. In addition, windmills qualified for a “business energy credit ?of 15 percent, reducing federal income taxes by another 15 percent of the cost. 

Assume that a windmill’s economic life is 20 years. Goladen’s required rate of return is 14 percent after taxes, and the marginal income tax rate is 45 percent. Assume windmills qualify for a CCA rate of 25 percent declining balance. 

1. Would Gino purchase a windmill without the tax credits? Calculate the net present value. 

2. Would Gino purchase a windmill with the tax credits? Calculate the net present value. 

3. What is the most that Gino would pay for a windmill, provided the tax credits are available?