Problem 11-9 Capital budgeting criteria: ethical considerations An electric util
ID: 2650686 • Letter: P
Question
Problem 11-9
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 $210.17 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 $75.23 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 18%.
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 %
Explanation / Answer
Calculation of NPV without mitigation
-21.919
NPV without mitigation @ 18% = 8.734
IRR without mitigation = 18% + 2% i.e 20%
2) Calculation of NPV with Mitigation
NPV with mitigation = -14.9107
IRR = 10% + 5.6106 i.e 15.6106%
Particulars Year Cash flow PVF @ 18% PV @ 18% PVF @ 25% PV @ 25% Initial Cash Outflow 0 210.17 1 210.17 1 210.17 Present value of cash outflows 210.17 210.17 Cash inflows 1 to 5 70 3.1272 218.904 2.6893 188.251 Present value of cash inflows 218.904 188.251 Net Present Value 8.734-21.919