A mining company is considering a new project. Because the mine has received a p

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 $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 13%. 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 %

Explanation / Answer

If we do do mitigation, then initial outflow=$(9.33+54)=$63.33 million and cash flows would be $19 million for 5 years.

Thus, NPV= 19*PVAF(13%,5)-63.33=19*3.5172-9.33=66.8274-63.33=$3.53 million

At IRR, NPV=0.

So, 19*PVAF(r,5)-63.33=0

PVAF(r,5)=3.3332

Trial 1: if r=14%, LHS=3.4331

Trial 2: if r=16%, LHS=3.2743

So, r=14+2*(3.3332-3.4331)/(3.2743-3.4331)

=14+2*0.0999/0.1588

=14+1.2582

=15.2582  

So IRR is 15.26% for this project.

If we do do not do mitigation, then initial outflow=$54 million and cash flows would be $18 million for 5 years.

Thus, NPV= 18*PVAF(13%,5)-54=18*3.5172-54=63.3096-54=$9.31 million

At IRR, NPV=0.

So, 18*PVAF(r,5)-54=0

PVAF(r,5)=3

Trial 1: if r=18%, LHS=3.1272

Trial 2: if r=20%, LHS=2.9906 which is approximately equal to 3.

So IRR is 20% for this project.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.