Capital budgeting criteria: ethical considerations A mining company is consideri
ID: 2767990 • Letter: C
Question
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 11%. a. 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. 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.Explanation / Answer
The NPV calculation with mitigation with following assumptions
The initial investment at year 0 will be $ 70 million
The annual cash inflow is $21 million for 5 years
The cost of capital is 11%
The present value of $1 received annually for 5 years at 11% is 3.6959
The NPV will be $7.61 million
Particulars
Amount($) in million
Present value of cash inflow for 5 years = $21 X 3.6959
77.61
Present value of total cash inflows
77.61
Less-:
present value of cash oulflow on investment
70.00
present value of total cash outflows
70.00
Net present value (total cash inflows minus total Cash outflows)
7.61
The calculation of IRR with mitigation , Internal Rate of Return is the interest rate that makes the Net Present Value zero.
The IRR % will be 15.24%
The NPV calculation without mitigation with following assumptions
The initial investment at year 0 will be $ 60 million
The annual cash inflow is $20 million for 5 years
The cost of capital is 11%
The present value of $1 received annually for 5 years at 11% is 3.6959
The NPV will be $13.92 million
Particulars
Amount($) in million
Present value of cash inflow for 5 years = $20 X 3.6959
73.92
Present value of total cash inflows
73.92
Less-:
present value of cash oulflow on investment
60.00
present value of total cash outflows
60.00
Net present value (total cash inflows minus total Cash outflows)
13.92
The calculation of IRR with mitigation , Internal Rate of Return is the interest rate that makes the Net Present Value zero.
The calculation of IRR without mitigation , Internal Rate of Return is the interest rate that makes the Net Present Value zero.
The IRR % will be 19.86%
Particulars
Amount($) in million
Present value of cash inflow for 5 years = $21 X 3.6959
77.61
Present value of total cash inflows
77.61
Less-:
present value of cash oulflow on investment
70.00
present value of total cash outflows
70.00
Net present value (total cash inflows minus total Cash outflows)
7.61