Capital budgeting criteria: ethical considerations A mining company is consideri
ID: 2720071 • Letter: C
Question
Capital budgeting criteria: ethical considerations 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 $10.66 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 $66 million, and the expected net cash inflows would be $22 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $23 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. 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
a.
Calculation of NPV with Mitigation:
$ in Million
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Mine Development Cost
(66.00)
Mitigation Cost
(10.66)
Expected cash flows
23.00
23.00
23.00
23.00
23.00
Net Cash flows (CF)
(76.66)
23.00
23.00
23.00
23.00
23.00
PVF(11%)
1.00000
0.90090
0.81162
0.73119
0.65873
0.59345
PV = CF*PVF
(76.66)
20.72
18.67
16.82
15.15
13.65
NPV = Sum of PVs
8.35
Calculation of IRR with Mitigation:
$ in Million
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Net Cash flows (CF)
(76.66)
23.00
23.00
23.00
23.00
23.00
IRR (Using Excel formula) = IRR()
15.24%
b.
Calculation of NPV without Mitigation:
$ in Million
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Mine Development Cost
(66.00)
Expected cash flows
22.00
22.00
22.00
22.00
22.00
Net Cash flows (CF)
(66.00)
22.00
22.00
22.00
22.00
22.00
PVF(11%)
1.00000
0.90090
0.81162
0.73119
0.65873
0.59345
PV = CF*PVF
(66.00)
19.82
17.86
16.09
14.49
13.06
NPV = Sum of PVs
15.31
Calculation of IRR without Mitigation:
$ in Million
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Net Cash flows (CF)
(66.00)
22.00
22.00
22.00
22.00
22.00
IRR (Using Excel formula) = IRR()
19.86%
a.
Calculation of NPV with Mitigation:
$ in Million
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Mine Development Cost
(66.00)
Mitigation Cost
(10.66)
Expected cash flows
23.00
23.00
23.00
23.00
23.00
Net Cash flows (CF)
(76.66)
23.00
23.00
23.00
23.00
23.00
PVF(11%)
1.00000
0.90090
0.81162
0.73119
0.65873
0.59345
PV = CF*PVF
(76.66)
20.72
18.67
16.82
15.15
13.65
NPV = Sum of PVs
8.35
Calculation of IRR with Mitigation:
$ in Million
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Net Cash flows (CF)
(76.66)
23.00
23.00
23.00
23.00
23.00
IRR (Using Excel formula) = IRR()
15.24%
b.
Calculation of NPV without Mitigation:
$ in Million
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Mine Development Cost
(66.00)
Expected cash flows
22.00
22.00
22.00
22.00
22.00
Net Cash flows (CF)
(66.00)
22.00
22.00
22.00
22.00
22.00
PVF(11%)
1.00000
0.90090
0.81162
0.73119
0.65873
0.59345
PV = CF*PVF
(66.00)
19.82
17.86
16.09
14.49
13.06
NPV = Sum of PVs
15.31
Calculation of IRR without Mitigation:
$ in Million
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Net Cash flows (CF)
(66.00)
22.00
22.00
22.00
22.00
22.00
IRR (Using Excel formula) = IRR()
19.86%
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