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 require an initial outlay of $269.63 million, and the expected cash inflows would be $90 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $94.12 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 17%.
Calculate the NPV and IRR with mitigation. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to two decimal places.
NPV: $ million
IRR: %
Calculate the NPV and IRR without mitigation. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to two decimal places.
NPV: $ million
IRR: %
How should the environmental effects be dealt with when evaluating this project?
-Select-IIIIIIIVVI
Should this project be undertaken?
-Select-IIIIIIIVV
Please make answers easy to see! thank you!
With Mitigation
Initial Investment with mitigation =269.63+40 =309.63
Cash Inflows =94.12
Rate =17%
Number of Periods =5
NPV =PV of Cash Flows -Investment
=94.12*((1-(1+17%)^-5)/17%)-309.63 =-8.51
IRR Using Financial Calculator
CF0=-309.63;CF1 =94.12;CF2=94.12;CF3=94.12;CF4=94.12;CF5=94.12;CPT
IRR =15.80%
Without Mitigation
Initial Investment without mitigation =269.63
Cash Inflows =90
Rate =17%
Number of Periods =5
NPV =PV of Cash Flows -Investment =90*((1-(1+17%)^-5)/17%)-269.63
=18.31
IRR Using Financial Calculator
CF0=-269.63;CF1 =90;CF2=90;CF3=90;CF4=90;CF5=90;CPT IRR
=19.92%
b. Option II is correct option (Environmental costs should
always be taken into consideration as it might cause losses in
future
c . Option III is correct option.
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