Capital budgeting criteria: ethical considerations An electric utility is consid

Question

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 $270.22 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 $94.48 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 19%. Calculate the NPV and IRR with mitigation. Round your answers to two decimal places. Enter your answer for NPV in millions. NPV $______ million IRR_________ %

Explanation / Answer

With Mitigation, Initital Inv = 270.22+40 = 310.22M. SO CFo = -310.22M So NPV will be = NPV(Rate, CFs) + CFo = NPV(19%,94.48,94.48,94.48,94.48,94.48) - 310.22 = $(21.33)M IRR= IRR(CFs) = IRR(-310.22,94.48,94.48,94.48,94.48,94.48) = 15.88%

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