In: Finance
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 cost $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 $75.83 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 16%.
Calculate the NPV and IRR with mitigation. Round your answers to
two decimal places. Enter your answer for NPV in millions. Do not
round your intermediate calculations. For example, an answer of
$10,550,000 should be entered as 10.55. Negative value should be
indicated by a minus sign.
NPV $ million
IRR %
Calculate the NPV and IRR without mitigation. Round your answers
to two decimal places. Enter your answer for NPV in millions. Do
not round your intermediate calculations. For example, an answer of
$10,550,000 should be entered as 10.55.
NPV $ million
IRR %
a:
Year | With mitigation | Without mitigation |
0 | -249.8 | -209.8 |
1 | 70 | 75.83 |
2 | 70 | 75.83 |
3 | 70 | 75.83 |
4 | 70 | 75.83 |
5 | 70 | 75.83 |
NPV | -20.60 | 38.49 |
IRR | 12.41% | 23.63% |
b: III: If the utility mitigates for the environmental effects, the project is not acceptable. However, before the company chooses to do the project without mitigation, it needs to make sure that any costs of "ill will" for not mitigating for the environmental effects have been considered in the original analysis.
(The company is likely to face additional costs in the form of loss of goodwill if the mitigation is not done. Hence the same must be taken into account)
c: V
(The company is likely to face additional costs in the form of loss of goodwill if the mitigation is not done. Hence the same must be taken into account. NPV of taking up the project with mitigation is negative, and the NPV of taking the project without mitigation is positive, yet the costs of losing goodwill must be taken into account before making a final decision)
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