Question

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 $10.66 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 $66 million, and the expected cash inflows would be $22 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $23 million. The risk-adjusted WACC is 15%.

a. 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.

Answer 1

a). With Mitigation:

Initial Investment = $66 + $10.66 = $76.66 million

Expected Cash Inflows = $23 million

So, to find the NPV, we need to put the following values in the financial calculator:

CF0 = -76.66; C01 = 23; F01 = 5;

Press NPV, put I = 15, press down arrow key, then CPT, which gives,

Hence, NPV = $0.44 million

Now, to find the IRR, we need to put the following values in the financial calculator:

CF0 = -76.66; C01 = 23; F01 = 5;

Press IRR, then CPT, which gives,

Hence, IRR = 15.24%