Problem 11-9 Capital budgeting criteria: ethical considerations An electric util

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

in millions without mitigation year inflow/(outflow) discounted factor present value 0 $210.17 1 $210.17 1 $70 0.847 $59.29 2 $70 0.718 $50.26 3 $70 0.608 $42.56 4 $70 0.515 $36.05 5 $70 0.437 $30.59 $218.75 NPV=218.75-210.17 8.58 million calculation of valur of IRR 10% year inflow/(outflow) discounted factor present value 0 $210.17 1 $210.17 1 $70 0.909 $63.63 2 $70 0.826 $57.82 3 $70 0.751 $52.57 4 $70 0.683 $47.81 5 $70 0.620 $43.40 $265.23 NPV=265.23-210.17 55.06 million 20% year inflow/(outflow) discounted factor present value 0 $210.17 1 $210.17 1 $70 0.833 $58.31 2 $70 0.694 $48.58 3 $70 0.578 $40.46 4 $70 0.482 $33.74 5 $70 0.401 $28.07 $209.16 NPV=209.16-210.17 -1.01 million formula of IRR= lower rate+lower rate NPV/Lower rate NPV-higher rate NPV*differnce in rates 10+55.06/55.06+1.01*10 19.82% we have assumed this cashinflow is for the five years with mitigation year inflow/(outflow) discounted factor present value 0 $40 1 $40.00 1 $75.23 0.847 $63.72 2 $75.23 0.718 $54.02 3 $75.23 0.608 $45.74 4 $75.23 0.515 $38.74 5 $75.23 0.437 $32.88 $235.09 NPV=235.09-40 195.09

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