MIE 353:Engineering EconomicsTerm Project: Energy Group

MemorandumDate: December 9, 2015To: Varian SemiconductorsFrom: William Andrews, Adam Chien, and Connor EckstromRegarding: Which of the three current production facilities will provide the greatest benefits from the installation of a 2.5 MW wind turbine on site to provide energy and reduce annual costs for power.Alternatives: Alternative Eckstrom, located in Gloucester, MassachusettsAlternative Andrews, located in Fort Worth, TexasAlternative Chien, located in Forth, Scotland

Abstract: Our group will research the costs and benefits of installing a single wind turbine at one of the three semiconductor production facilities owned by Varian. We will assume that Varian has three facilities in three locations, and we will use the production needs for Gloucester in our calculations for the other two facilities because we will assume that each facility will have similar production quantities. While we will use this as a baseline for our comparisons, we will make the assumption that the Gloucester turbine has not yet been installed, and we will determine whether it was more economically beneficial to install the wind turbine in Gloucester as it is currently or if one of the other two semiconductor facilities would have provided more benefits from the installation of a 2.5 MW wind turbine.

Locations: Gloucester, Massachusetts and Fort Worth, Texas will be the two domestic facilities under consideration for the wind turbine comparison. Forth, Scotland will serve as our overseas location. We chose these locations using the existing Gloucester as our baseline for comparison, using actual values put out by Varian to use in our analysis. Texas currently has the greatest wind capacity installed and would allow for the company to expand towards the south western United States and west coast in general. The availability of wind turbine companies in the Texas area may allow for cheaper installation costs due to more availability of options for choosing a client to install and maintain the turbine. Also Texas has more open land, and may have cheaper land rates. As for Forth, Scotland, a semiconductor facility in that location would allow Varian to expand into the European market as a semiconductor facility and the location also provides good wind averages comparable to that of the Gloucester location. Each location will have different tax policies, having an affect on the yearly income after taxes.

Assumptions & Cost Layout:Time scale: Assuming a 40-year time period to allow for full depreciation of the companies investment.Turbine Replacement: With the lifespan of a wind turbine being 30 years and the scale of the study being 40 years, it is assumed the company will need to replace the turbines main components (which roughly costs 30% of the initial cost since only blades and generators need to be replaced and not the entire structure including the tower, base, and wiring infrastructure)Average Wind Speeds The values below were used to compare production quantities by location.

Locations Value in mph RemarksGloucester, Massachusetts 15 mph Data from Weatherspark.comFort Worth, Texas 11 mph Data from Weatherspark.comForth, Scotland 13 mph Data from Weatherspark.com

Gloucester, Massachusetts Turbine Cost AssumptionsEstimates Rate Remarks

Construction Cost ($/kW) 1940 Includes Price of turbine and all costs associated with building and installing the turbine. Value averaged from different companies’ rates for costs in dollars per KW of the energy capacity of a wind turbine, which in our case is a 2.5 MW turbine

Initial Total Cost ($) 4,850,000 Determined using 1940 ($/kW) * (2500 kW/MW) = 4,850,000

M&O ($/kWh) 0.01 Increasing at a rate of 1% each year

Labor Cost ($/yr) 50,000 Assumed flat rate for each location can vary greatly any given year. One year may operate smoothly will little to no costs, another year might require a million dollar fix, thus 50k/year provides an average over the 40 year period

Other Various Costs ($/kWh) 0.138 Levelized Cost of Electricity, values sourced from Department of Energy website

Useful Life (years) 30 Average lifespan of a 2.5 MW wind turbine

Discount Rate 0.1

Tax Rate 0.26 Federal rate

Production Quantity (kWh/year) 8,500,000 Value taken from Varian’s company blog

Fort Worth, Texas Turbine Cost AssumptionsEstimates Rate Remarks

Construction Cost ($/kW) 1440 Assumed to be 500 $/kW cheaper based on availability of wind turbine companies for installation in Texas location

Initial Total Cost ($) 3,600,000 Determined with same procedure as Gloucester value

M&O ($/kWh) 0.005 Increasing at a rate of 1% each year

Labor Cost ($/yr) 50,000 Assumed flat rate, can vary greatly any given year

Other Various Costs ($/kWh) 0.0855 Levelized Cost of Electricity, values sourced from Department of Energy website

Useful Life (years) 30 Average lifespan of a 2.5 MW wind turbine

Discount Rate 0.1

Tax Rate 0.26 Federal rate

Production Quantity (kWh/year) 6,233,333.33 Values based on Gloucester’s turbine production quantities and then adjusted using a ratio of average wind speeds between locations. For example, ((11 mph in Fort Worth)/(15 mph in Gloucester)) * ($8,500,000) = $6,233,333.33

Forth, Scotland Turbine Cost AssumptionsEstimates Rate Remarks

Construction Cost ($/kW) 1850 Includes Price of turbine and all costs associated with building and installing the turbine

Initial Total Cost ($) 4,625,000 Determined with same procedure as Gloucester value

M&O ($/kWh) 0.018 Increasing at a rate of 1% each year

Labor Cost ($/yr) 50,000 Assumed flat rate, can vary greatly any given year

Other Various Costs ($/kWh) 0.12 Levelized Cost of Electricity (LCOE)

Useful Life (years) 30

Discount Rate 0.12

Tax Rate 0.21

Production Quantity (kWh/year) 7,366,666.67 Determined using same wind ratio procedure as Texas location based on the 13 mph wind speed average for Forth, Scotland

Results & Analysis:Gloucester, Massachusetts:

-3000000

-2500000

-2000000

-1500000

-1000000

-500000

0

500000

1000000

1500000

Cash Flow Diagram of Raw Profit

Year Construction Cost, $ Total M&O Cost, $

Labor Cost Savings on Electricity, $

Time (years)

Pro

fit (

$)

CFD Explanation & Analysis: We used the values of each locations project costs and savings in Excel and applied formulations in Excel over a 40 year period to produce the diagrams for each individual location. Initial cost goes off of the bottom of the chart due to its very large value and the need to provide a scale in which you can clearly see the gradients included in the diagram and the smaller values of things like labor costs and maintenance. We assume that production would not start at 100% and that it would increase from 75% the first year in use, to 85% in its second year, up to a 100% in its third year of production. In our calculations we also assumed that maintenance costs

would increase over time by a rate of 1% each year (due to the obvious aging of the turbine), and after the 30 year lifespan of the turbine, we would have to restore the turbine place, and its total cost would only be a fraction of the first initial cost as explained in our assumptions earlier. The turbine would increase production rates at the same rate as the previous turbine. This method for creating the CFD was applied to all three locations.

Annual Worth: Sample Calculation (Applied to three locations)AW = -4850(A/P, 10, 30) + 879.75 - 38.709 (A/G, 10, 30) - 879.75 (A/P,10,30) - 879.75*0.25 (P/F, 10, 2) (A/P, 10, 30) - 879.75*0.15 (P/F, 10, 3) (A/P, 10, 30) - 739.97 (A/P, 10, 30) - 1455 (A/P, 10, 40) (P/F, 10, 40) + (A/P, 10, 40) (P/F, 10, 30) { 879.75 (P/A, 10, 10) - 38.709 (P/G, 10, 10) - 879.75*0.25 (P/F, 10, 2) (A/P, 10, 10) - 879.75*0.15 (P/F, 10, 3) (A/P, 10, 10) }= + 159.71K

Discount Payback period (Calculated through Excel) = 7.57 years

Net CFBT(Over 40 years): $32,702,187.36Net CFAT(Over 40 years): $23,821,318.65

Fort Worth, Texas:

0 5 10 15 20 25 30 35 40 45

($6,000,000.00)

($5,000,000.00)

($4,000,000.00)

($3,000,000.00)

($2,000,000.00)

($1,000,000.00)

$0.00

$1,000,000.00

$2,000,000.00

CFBT/CFAT Comparison

CFBT CFAT

Years

-2500000

-2000000

-1500000

-1000000

-500000

0

500000

1000000

Cash Flow Diagram, Raw Profit

Year Construction Cost, $ Total M&O Cost, $

Labor Cost Savings on Electricity, $

Time (Years)

Pro

fit (

$)

Annual Worth: (Calculated with same formulation as Gloucester,MA) = -90.69K

Discounted Payback Period (calculated through Excel) = 26.36 years

Net CFBT(Over 40 years): $12,853,130.39 Net CFAT(Over 40 years): $9,230,516.49

Forth, Scotland

0 5 10 15 20 25 30 35 40 45

($4,000,000.00)($3,500,000.00)($3,000,000.00)($2,500,000.00)($2,000,000.00)($1,500,000.00)($1,000,000.00)

($500,000.00)$0.00

$500,000.00 $1,000,000.00

CFBT/CFAT Comparison

CFBT CFAT

Year

-3000000-2500000-2000000-1500000-1000000

-5000000

5000001000000

Cash Flow Diagram,Raw Profit

Year Construction Cost, $ Total M&O Cost, $

Labor Cost Savings on Electricity, $

Time (Years)

Pro

fit (

$)

Annual Worth: (Calculated with same formulation as Gloucester,MA) = -213.01K

Discounted Payback Period (calculated through Excel): Payback is never reached over 40 year period

Net CFBT(Over 40 years): $10,904,096.99 Net CFAT(Over 40 years): $7,708,281.77

After conducting an analysis of the cash flows before taxes using the NPV function in excel, the rates at which our two lower alternatives (Alternative Andrews and Alternative Chien) become equivalent to Alternative Eckstrom (assuming that Alternative Eckstrom keeps the same rate) are as listed below:Fort Worth, Texas: 4.25149161%

0 5 10 15 20 25 30 35 40 45

($5,000,000.00)

($4,000,000.00)

($3,000,000.00)

($2,000,000.00)

($1,000,000.00)

$0.00

$1,000,000.00

CFBT/CFAT Comparison

CFBT CFAT

Years

Forth, Scotland: 3.220567745%

Conclusion & Recommendation:The location that would most greatly benefit from the wind turbine installation would be the Gloucester

location. This is greatly backed by the results and economic analysis conducted to compare each of the locations. The positive cash flows for savings in the Gloucester location far exceeds the other two locations, even with both locations having cheaper costs of electricity. Texas also had cheaper construction & maintenance costs, but had the same tax rate as the Gloucester location. The Forth location in Scotland had cheaper construction rates as well, and a lower tax rate, but Gloucester still proves to be most benefited by the wind turbine installation. This is mostly due to the great wind capacity of the Cape Ann area where Gloucester is located, having an average wind speed of 15 mph, greater than the 11 mph of Fort Worth and the 13 mph of Forth. This greater wind speed results in a much larger production quantity for electricity, resulting in huge savings allowing Varian to save a lot of money on energy costs, which accounts for a 10% of their annual operating budget. The net cash flow after taxes over a 40-year period greatly favors the Gloucester location, with an excellent $23,821,318.65. Fort Worth has only a $9,230,516.49 net cash flow after tax over the 40-year period, and Forth only having a net cash flow after tax of $7,708,281.77. By our calculations Gloucester was the only location to provide a positive annual worth, with a value of 159.71K. The Gloucester location had a great payback period of only 7.57 years as compared to the 26.36 years of the Fort Worth location in Texas. The Forth location in Scotland never reaches payback over the 40-year period. With the results weighing heavily in favor of the Gloucester location, it is clear that this location would most benefit from the installation of a 2.5MW wind turbine on-site to provide power for Varian’s semiconductor facility.References:-http://www.mass.gov/eea/docs/eea/ota/resource-conservation/wind-turbine-varian.pdf -http://www.appliedmaterials.com/company/news/press-releases/2012/11/applied-materials-announces-fourth-quarter-and-fiscal-year-2012-results-https://www.gov.uk/corporation-tax-rates/rates-https://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/taxes-incentives-renewable-energy-v1.pdf-https://www.irena.org/documentdownloads/publications/re_technologies_cost_analysis-wind_power.pdf