Question

An electric utility is considering a new power plant in northern Arizona. Power from the plant would be sold in the Phoenix area, where it is badly needed. Because the firm has received a permit, the plant would be legal; but it would cause some air pollution. The company could spend an additional $40 million at Year 0 to mitigate the environmental problem, but it would not be required to do so. The plant without mitigation would require an initial outlay of $209.80 million, and the expected cash inflows would be $70 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $75.33 million. Unemployment in the area where the plant would be built is high, and the plant would provide about 350 good jobs. The risk adjusted WACC is 17%.

Calculate the NPV and IRR with mitigation. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to two decimal places.

NPV: $   million

IRR: %

Calculate the NPV and IRR without mitigation. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to two decimal places.

NPV: $   million

IRR: %

Answer 1

With mitigation:

NPV	-        8.79	$ million
IRR	15.46	%

Calculations for NPV:

Year	Cash flow (in $ millions)	1+r	PVIF	PV = cash flow*PVIF
0	-        249.80	1.17	1.0000	-     249.80
1	75.33		0.8547	64.38
2	75.33		0.7305	55.03
3	75.33		0.6244	47.03
4	75.33		0.5337	40.20
5	75.33		0.4561	34.36
			NPV	-          8.79

Calculations for IRR:

Year	Cash flow (in $ millions)	1+r	PVIF	PV = cash flow*PVIF
-	-        249.80	1.1546	1.0000	-     249.80
1	75.33		0.8661	65.24
2	75.33		0.7501	56.51
3	75.33		0.6497	48.94
4	75.33		0.5627	42.39
5	75.33		0.4874	36.71
			NPV	0.00

Without mitigation:

NPV	14.15	$ million
IRR	19.90	%

NPV computation:

Year	Cash flow (in $ millions)	1+r	PVIF	PV = cash flow*PVIF
0	-        209.80	1.17	1.0000	-     209.80
1	70.00		0.8547	59.83
2	70.00		0.7305	51.14
3	70.00		0.6244	43.71
4	70.00		0.5337	37.36
5	70.00		0.4561	31.93
			NPV	14.15

IRR computation:

Year	Cash flow (in $ millions)	1+r	PVIF	PV = cash flow*PVIF
-	-        209.80	1.1990	1.0000	-     209.80
1	70.00		0.8340	58.38
2	70.00		0.6956	48.69
3	70.00		0.5802	40.61
4	70.00		0.4839	33.87
5	70.00		0.4036	28.25
			NPV	0.00