Problem 11-8 Capital budgeting criteria: ethical considerations A mining company
ID: 2650793 • 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 with mitigation
Initial Outflows=69+11 =80 Million
Cash Inflows=24 Million for 5 years @13%
NPV= Cash Inflows(Pv,5 Yeras)- Cash Outflows
=24/(1+.13)5-80
=24*3.51-80 = 4.41 Million
Calculation of IRR @ 16%
=24*3.27-80=-1.52
IRR= Lowest Rate+NPV at lowest Rate/NPV at highest-NPV at lowest*(Highest Rate-Lowest Rate)
=13+4.41/4.41-(1.52)*(16-13)
IRR=15.23%
Without Migration
NPV=23*3.51-69= 11.73 Million
IRR
NPV @ 20%= 23*2.99-69=.23
IRR= 13+11.731/11.73-(-.23)*(20-13)
IRR= 19.86%