Capital budgeting criteria: ethical considerations A mining company is consideri
ID: 2773881 • 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 $11 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 $69 million, and the expected net cash inflows would be $23 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $24 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.
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
Without Mitigation year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Total Initial Investment -69.00 Cash Inflows 23.00 23.00 23.00 23.00 23.00 Total Cashflows (A) -69.00 23.00 23.00 23.00 23.00 23.00 PVF @ 11% (B) 1 0.901 0.812 0.731 0.659 0.593 Present Value (A * B) -69.00 20.72 18.67 16.82 15.15 13.65 16.01 With Mitigation year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Total Initial Investment -80.00 Cash Inflows 24.00 24.00 24.00 24.00 24.00 Total Cashflows (A) -80.00 24.00 24.00 24.00 24.00 24.00 PVF @ 11% (B) 1 0.901 0.812 0.731 0.659 0.593 Present Value (A * B) -80.00 21.62 19.48 17.55 15.81 14.24 8.70 Without Mitigation 19.9% With Mitigation 15.2%
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