capital budgeting: ethical considerations A mining company is considering a new

Question

capital budgeting: 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 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 $60 million, and the expected cash inflows would be $20 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $21 million. The risk-adjusted WACC is 12%. -Calculate the NPV with and without mitigation?

Explanation / Answer

No mitigation analysis (in millions of dollars):

Using a financial calculator, enter the data as follows:

CF0 = -60;

CF1-5 = 20;

I/YR = 12.

Solve for NPV = $12.10 million and IRR = 19.86%.

With mitigation analysis (in millions of dollars):

Using a financial calculator, enter the data as follows:

CF0 = -70;

CF1-5 = 21;

I/YR = 12.

Solve for NPV = $5.70 million and IRR = 15.24%.

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