Question

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 company could spend an additional R10 million at Year 0 to mitigate the environmental problem, however it would not be required to do so. Developing the mine (without mitigation) would cost R60 million, and the expected cash inflows would be R20 million per year for 5 years. If the company does invest in mitigation, the annual inflows would be R21 million. The risk-adjusted WACC is 12%.
Required:
2.1 Calculate the NPV and IRR without mitigation. (5)
2.2 How should the environmental effects be dealt with when evaluating this project? (5)
2.3 Should this project be undertaken? If so, should the company do mitigation? Why or why not?

Answer 1