In: Finance
CAPITAL BUDGETING CRITERIA: ETHICAL CONSIDERATIONS
A mining company is considering a new project. Because the mine has received a permit, the project would be legal; but it would cause significant harm to a nearby river. The firm could spend an additional $9 million at Year 0 to mitigate the environmental Problem, but it would not be required to do so. Developing the mine (without mitigation) would cost $51 million, and the expected cash inflows would be $17 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $18 million. The risk-adjusted WACC is 14%.
Calculate the NPV and IRR with mitigation. Round your answers to
two decimal places. Do not round your intermediate calculations.
Enter your answer for NPV in millions. For example, an answer of
$10,550,000 should be entered as 10.55.
NPV $ million
IRR %
Calculate the NPV and IRR without mitigation. Round your answers
to two decimal places. Do not round your intermediate calculations.
Enter your answer for NPV in millions. For example, an answer of
$10,550,000 should be entered as 10.55.
NPV $ million
IRR %
How should the environmental effects be dealt with when this project is evaluated?
Should this project be undertaken?
-Select-Even when mitigation is considered the project has a
positive IRR, so it should be undertaken.The project should not be
undertaken under the "no mitigation" assumption.The project should
be undertaken only under the "no mitigation" assumption.The project
should not be undertaken under the "mitigation" assumption.Even
when mitigation is considered the project has a positive NPV, so it
should be undertaken.
If so, should the firm do the mitigation?
1.
=-51-9+18/14%*(1-1/1.14^5)=1.795457439 million
2.
=-51-9+18/IRR*(1-1/(1+IRR)^5)=0
=>IRR=15.2383%
3.
=-51+17/14%*(1-1/1.14^5)=7.36 million
4.
=-51+17/IRR*(1-1/(1+IRR)^5)=0
=>IRR=19.8577%
5.
The environmental effects if not mitigated could result in
additional loss of cash flows and/or fines and penalties due to ill
will among customers, community, etc. Therefore, even though the
mine is legal without mitigation, the company needs to make sure
that they have anticipated all costs in the "no mitigation"
analysis from not doing the environmental mitigation.
6.
Even when mitigation is considered the project has a positive NPV,
so it should be undertaken.
Under the assumption that all costs have been considered, the company would not mitigate for the environmental impact of the project since its NPV with mitigation is greater than its NPV when mitigation costs are not included in the analysis.