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 $9.66 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 $57 million, and the expected net cash inflows would be $19 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $20 million. The risk adjusted WACC is 10%. b.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.

Explanation / Answer

NPV and IRR with mitigation: IRR = 15.24% NPV and IRR without mitigation: IRR = 19.86% b. Environmental effects could be added by estimating penalties or any other cash outflows that might be imposed on the company. These outflows could be so large as to cause the project to have a negative NPV, in which case the project should not be undertaken. c. The project without mitigation should be undertaken because NPV without mitigation is higher than NPV with mitigation, its NPV is positive and its IRR is greater than the companys cost of capital.

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