Problem 11-8 Capital budgeting criteria: ethical considerations A mining company
ID: 2650792 • Letter: P
Question
Problem 11-8
Capital budgeting criteria: ethical considerations
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 firm could spend an additional $11 million at Year 0 to mitigate the environmental Problem, but it would not be required to do so. Developing the mine (without mitigation) would cost $69 million, and the expected net cash inflows would be $23 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $24 million. The risk adjusted WACC is 13%.
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
NPV Without mitigation: (in $ million). please note the formula used for PV = amount of cash flow/(1+WACC)^time
NPV = sum of all PVs
NPV with mitigation:
NPV is $4.41 millions.
IRR is the rate which makes the NPV equal to zero. Using solver in excel:
IRR is 15.23%
Without mitigation:
NPV is $11.89 million
IRR calculation using trial and error method in excel:
IRR = 19.86%