In: Accounting
CAPITAL BUDGETING CRITERIA: ETHICAL
CONSIDERATIONS
A mining company is considering a new project. Because the mine...
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 10%.
-
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__ %
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How should the environmental effects be dealt with when this
project is evaluated?
- The environmental effects should be ignored since the mine is
legal without mitigation.
- The environmental effects should be treated as a sunk cost and
therefore ignored.
- The environmental effects if not mitigated would result in
additional cash flows. Therefore, since the mine is legal without
mitigation, there are no benefits to performing a "no mitigation"
analysis.
- The environmental effects should be treated as a remote
possibility and should only be considered at the time in which they
actually occur.
- 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.
-
Should this project be undertaken?
-Select-Even when mitigation is considered the project has a
positive NPV, so it should be undertaken.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.Item 6
If so, should the firm do the mitigation?
- Under the assumption that all costs have been considered, the
company would 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.
- 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.
- Under the assumption that all costs have been considered, the
company would mitigate for the environmental impact of the project
since its IRR with mitigation is greater than its IRR when
mitigation costs are not included in the analysis.
- 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.
- Under the assumption that all costs have been considered, the
company would not mitigate for the environmental impact of the
project since its IRR without mitigation is greater than its IRR
when mitigation costs are included in the analysis.