This report is focussed on analysing the economic feasibility of the proposed off shore wind farm project by Paok Ltd. The methodology used to analyse the viability of the project is Net Present Value (NPV), which is the sum of the present value of all its cash flows, both inflows and outflows, discounted at a rate consistent with the project’s risk (Arnold, 2012).
2. Economic feasibility of the project
The economic feasibility analysis of an offshore wind farm project, which requires high initial investments, plays a very important role in the viability of the project (Oliveira and Fernandes, 2011).The analysis of the gathered data showed that NPV of the proposed offshore wind farm project is negative -£590,079,996.09 (Refer to appendix 1.1).
Wind energy is a capital-intensive technology and to be economical, the project needs to be large scale, which requires a substantial amount of initial investment (Blanco, 2009). The capital cost of the proposed project requires £751,500,000, which represents 70% of the total cost of the project over the 15 years. Therefore, the overall cash inflows (cash generated from electricity) over the 15 years are insufficient to cover the initial costs, other costs (e.g. salaries, advertising costs, and maintenance costs etc.)(Refer to appendix 2.1)(appendix needs editing) and to generate shareholder wealth, hence making it financially unattractive.
After 12 years, the project shows negative cash flows (Refer to appendix 2.1). One of the reasons is that the calculations for NPV takes time value of money into account, hence, added cash inflows far into the future do little to enhance the NPV (Arnold, 2013). Another reason is that the cash outflow for annual rental fees from year 12 to year 13 increases by 66.6% in comparison to the increase of 1.33% in cash inflow from cash generated by electricity (Refer to appendix 2.1). Hence, if the current...