Problem 11-8 Capital budgeting criteria: ethical considerations A mining company
ID: 2652624 • 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 $10 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 $60 million, and the expected net cash inflows would be $20 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $21 million. The risk adjusted WACC is 15%.
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
Ans
IRR
Details With Mitigation Without Mitigation Cost of the Project -600,00,000.00 -600,00,000.00 Cost of Mitigation -100,00,000.00 Total Initial Cash Outflow -700,00,000.00 -600,00,000.00 Annual Cash inflows 210,00,000.00 200,00,000.00 No of Year of Project 5 5 WACC 15% 15% Annuity Factor for 5 Years 3.3522 3.3522 Present Value of Cash inflow 703,96,200.00 670,44,000.00 NPV 3,96,200.00 70,44,000.00