An electric utility is considering a new power plant in northern Arizona. Power

Question

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, he 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 SO. The plant without mitigation would cost $240. 31 million, and the expected cash Inflows would be $80 million per year for 5 years. It the firm does invest in mitigation, the annual flows would be $84. 53 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 19%. 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 Calculate the NPV and IRR without mitigation. Round your answers to two decimal places. Enter your answer for example, an answer of $10,550,000 should be entered as 10. 55 How should the environmental effect be dealt with when evaluating this project? If the utility mitigates for the environmental effects, the project is not acceptable. However, before the company chooses to do the projects without mitigation, it need to make sore that any costs of "all will" for not mitigation for the environmental effects have been consideration in that analysis. The environmental effects should be treated as a remote possibility and should only be considered at the time in which they actually occur. The environmental effect if not mitigation would result in addition at cash flows. Therefore, since the plant is legal without mitigation, there are no benefits to performing a " no mitigation" analysis. The environmental effects should be ignored since the plant is legal without mitigation.

Explanation / Answer

Please keep the NPV as -21.90.

NPV is 4.30.

Compute the Net Present Vlaue with mitigation Year Cash Flows Discount @19% Present value of cash flows 0 -280.31 1 -280.31 1 84.53 0.840336134 71.03361345 2 84.53 0.706164819 59.69211214 3 84.53 0.593415814 50.16143877 4 84.53 0.498668751 42.15246956 5 84.53 0.419049371 35.42224332 -21.8481228

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