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 $10.33 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 $63 million, and the expected cash inflows would be $21 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $22 million. The risk-adjusted WACC is 11%.
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 %
-Select-I II III IV V
D. If so, should the firm do the mitigation?
-Select-I II III IV V
With Mitigation
Initial Investment with mitigation =63+10.33 =73.33
Cash Inflows =22
Rate =11%
Number of Periods =5
NPV =PV of Cash Flows -Investment =22*((1-(1+11%)^-5)/11%)-73.33
=7.98
IRR Using Financial Calculator
CF0=-73.33;CF1 =22;CF2=22;CF3=22;CF4=22;CF5=22;CPT IRR
=15.24%'
Without Mitigation
Initial Investment without mitigation =63
Cash Inflows =21
Rate =11%
Number of Periods =5
NPV =PV of Cash Flows -Investment =21*((1-(1+11%)^-5)/11%)-63
=14.61
IRR Using Financial Calculator
CF0=-63;CF1 =21;CF2=21;CF3=21;CF4=21;CF5=21;CPT IRR
=19.86%
With Mitigation
Initial Investment with mitigation =239.67+40 =279.67
Cash Inflows =85.25
Rate =19%
Number of Periods =5
NPV =PV of Cash Flows -Investment
=85.25*((1-(1+19%)^-5)/19%)-279.67 =-19.01
IRR Using Financial Calculator
CF0=-279.67;CF1 =20;CF2=20;CF3=20;CF4=20;CF5=20;CPT IRR
=15.92%
b. Option I is correct option (Environmental costs should always
be taken into consideration as it might cause losses in
future
c . Option V is correct option. NPV is positive even under
mitigation
d. Option V is correct Under the assumption that all costs have
been considered, the company would not mitigate for the
environmental impact of the project since its NPV without
mitigation is greater than its NPV when mitigation costs are
included in the analysis.
d.