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 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 10%.
Calculate the NPV and IRR with mitigation. Round your answers to
two decimal places. Do not round your intermediate calculations.
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. Do not round your intermediate calculations.
Enter your answer for NPV in millions. For example, an answer of
$10,550,000 should be entered as 10.55.
NPV $ million
IRR %
How should the environmental effects be dealt with when this project is evaluated?
Should this project be undertaken?
-Select-The project should not be undertaken under the "no
mitigation" assumption.The project should be undertaken only under
the "no mitigation" assumption.The project should not be undertaken
under the "mitigation" assumption.Even when mitigation is
considered the project has a positive NPV, so it should be
undertaken.Even when mitigation is considered the project has a
positive IRR, so it should be undertaken.Item 6
If so, should the firm do the mitigation?
1.
=-69-11+24/10%*(1-1/1.1^5)=10.9788824658028
2.
=RATE(5,24,-69-11)=15.2382371163585%
3.
=-69+23/10%*(1-1/1.1^5)=18.1880956963944
4.
=RATE(5,23,-69)=19.8577097872796%
5.
The environmental effects if not mitigated could result in
additional loss of cash flows and/or fines and penalties due to ill
will among customers, community, etc. Therefore, even though the
mine is legal without mitigation, the company needs to make sure
that they have anticipated all costs in the "no mitigation"
analysis from not doing the environmental mitigatio
6.
Under the assumption that all costs have been considered, the
company would not mitigate for the environmental impact of the
project since its NPV without mitigation is greater than its NPV
when mitigation costs are included in the analysis.
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