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 $9.33 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 $54 million, and the expected cash inflows would be $18 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $19 million. The risk-adjusted WACC is 12%.
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 "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.The project should not be undertaken under the "no
mitigation" assumption.The project should be undertaken only under
the "no mitigation" assumption.Item 6
If so, should the firm do the mitigation?
Year (n) | 0 | 1 | 2 | 3 | 4 | 5 |
Cash flow without mitigation (CF1) | -54 | 18 | 18 | 18 | 18 | 18 |
NPV (using NPV function) | 10.89 | |||||
IRR (using IRR function) | 19.86% | |||||
Cash flow with mitigation (CF2) | -63.33 | 19 | 19 | 19 | 19 | 19 |
NPV (using NPV function) | 5.16 | |||||
IRR (using IRR function) | 15.24% |
a). NPV with mitigation = 5.16 million; IRR = 15.24%
b). NPV without mitigation = 10.89 million; IRR = 19.86%
c). Option III is correct. The company needs to factor in other additional costs which could occur due to non-mitigation.
d). Option I is correct. If it is assumed that all costs have been taken into consideration then the company would not mitigate as its NPV, then, is higher.
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