Problem 11-9 Capital budgeting criteria: ethical considerations An electric util
ID: 2707662 • 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 $239.78 million, and the expected cash inflows would be $80 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $84.02 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 17%.
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 AND IRR WITHOUT MITIGATION
ANNUAL CASHFLOWS WITH MITIGATION = 80000000
INITIAL INVESTMENT WITH MITIGATION = 239750000
NPV OF THE PROJECT WITHOUT MITIGATION = 80000000*PVIFA(17%,5) - 239750000
=80000000*3.1993 - 239750000
=255944000
NPV AND IRR WITHOUT MITIGATION
ANNUAL CASHFLOWS WITH MITIGATION = 80000000
INITIAL INVESTMENT WITH MITIGATION = 239750000
NPV OF THE PROJECT WITHOUT MITIGATION = 80000000*PVIFA(17%,5) - 239750000
=80000000*3.1993 - 239750000
=255944000