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 $210.27 million, and the expected cash inflows would be $70 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $76.01 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. 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

initial investment with mitigation 40+210.27= $250.27 NPV with mitigation= -250.25+76.01 PVIFA(18%,5)= $-12.55million IRR, 250.25= 76.01 PVIFA(IRR,5) IRR= 15.802% NPV without mitigation= -210.27+70 PVIFA(18%,5)= $8.632million IRR, 210.27= 70 PVIFA(IRR,5) IRR= 19.857%

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