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 $11 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 $69 million, and the expected net cash inflows would be $23 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $24 million. The risk adjusted WACC is 11%. Calculate the NPV and IRR with mitigation. Round your answers to two decimal places. 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. 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

with mitigation
NPV = -(69+11) +24(1/1.11 + 1/1.112 +....+1.115) = 8.70million

IRR

0 = -(69+11 ) + 24(1/r + 1/r2 +....+r5) r = 15.24%



without mitigation

NPV = -(69) +23(1/1.11 + 1/1.112 +....+1.115) = 16.01million

IRR = -(69) + 23(1/r + 1/r2 +....+r5) r = 19.86%

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