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 $240.73 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 $84.66 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 18%.

Calculate the NPV and IRR with mitigation. Round your answers to
two decimal places. Enter your answer for NPV in millions. Do not
round your intermediate calculations. For example, an answer of
$10,550,000 should be entered as 10.55. Negative value should be
indicated by a minus sign.
NPV $[ ] million
IRR [ ] %
Calculate the NPV and IRR without mitigation. Round your answers
to two decimal places. Enter your answer for NPV in millions. Do
not round your intermediate calculations. 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
evaluating this project?
 The environmental effects should be ignored since the plant is
legal without mitigation.
 The environmental effects should be treated as a sunk cost and
therefore ignored.
 If the utility mitigates for the environmental effects, the
project is not acceptable. However, before the company chooses to
do the project without mitigation, it needs to make sure that any
costs of "ill will" for not mitigating for the environmental
effects have been considered in the original analysis.
 The environmental effects should be treated as a remote
possibility and should only be considered at the time in which they
actually occur.
 The environmental effects if not mitigated would result in
additional cash flows. Therefore, since the plant is legal without
mitigation, there are no benefits to performing a "no mitigation"
analysis.
SelectIIIIIIIVVItem 5
 Should this project be undertaken?
 The project should be undertaken only under the "mitigation"
assumption.
 The project should be undertaken since the IRR is positive
under both the "mitigation" and "no mitigation" assumptions.
 The project should be undertaken since the NPV is positive
under both the "mitigation" and "no mitigation" assumptions.
 Even when no mitigation is considered the project has a
negative NPV, so it should not be undertaken.
 The project should be undertaken only if they do not mitigate
for the environmental effects. However, they want to make sure that
they've done the analysis properly due to any "ill will" and
additional "costs" that might result from undertaking the project
without concern for the environmental impacts.