In: Finance
Capital budgeting criteria: ethical considerations
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 $210.55 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 $75.77 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 19%.
Calculate the NPV and IRR with mitigation. Round your answers to
two decimal places. 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. 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 with mitigation.
NPV=-210.55-40+75.77/19%*(1-1/1.19^5)=-18.8730044
IRR=RATE(5,-75.77,210.55+40)=15.58%
Calculate the NPV and IRR without mitigation.
NPV=-210.55+70/19%*(1-1/1.19^5)=3.484442289
IRR=RATE(5,-70,210.55)=19.74%
How should the environmental effects be dealt with when
evaluating this project?
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 that analysis.
Should this project be undertaken?
The project should be undertaken only if they do not mitigate for
the environmental effects. However, they want to make sure that
they've done the analysis properly due to any "ill will" that might
result from undertaking the project without concern for the
environmental impacts.