Question

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 $240.62 million, and the expected cash inflows would be $80 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $84.19 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. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to two decimal places.

NPV: $ million

IRR: %

Calculate the NPV and IRR without mitigation. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to two decimal places.

NPV: $ million

IRR: %

Answer 1

NPV and IRR with mitigation:

NPV = -$4.96 million and IRR = 15.24%

NPV computation:

Year	Cash flow	1+r	PVIF	PV = PVIF*cash flow
0	-280.62	1.16	1.0000	-280.62
1	84.19		0.8621	72.58
2	84.19		0.7432	62.57
3	84.19		0.6407	53.94
4	84.19		0.5523	46.50
5	84.19		0.4761	40.08
			NPV	-4.96

IRR computation:

Year	Cash flow	1+r	PVIF	PV = PVIF*cash flow
0	-280.62	1.1524	1.0000	-280.62
1	84.19		0.8678	73.06
2	84.19		0.7530	63.39
3	84.19		0.6534	55.01
4	84.19		0.5670	47.74
5	84.19		0.4920	41.42
			NPV	0.00000

Without mitigation:

NPV = $21.32 million and IRR = 19.74%

NPV calculations:

Year	Cash flow	1+r	PVIF	PV = PVIF*cash flow
0	-240.62	1.16	1.0000	-240.62
1	80.00		0.8621	68.97
2	80.00		0.7432	59.45
3	80.00		0.6407	51.25
4	80.00		0.5523	44.18
5	80.00		0.4761	38.09
			NPV	21.32

IRR computation:

Year	Cash flow	1+r	PVIF	PV = PVIF*cash flow
0	-240.62	1.1974	1.0000	-240.62
1	80.00		0.8351	66.81
2	80.00		0.6975	55.80
3	80.00		0.5825	46.60
4	80.00		0.4864	38.92
5	80.00		0.4062	32.50
			NPV	0.00000