Ch 11-End-of-Chapter Problems The Basics of Capital Budgeting

2. Problem 11.00 (Capital Budgeting Criteria: Ethical Considerations)

flook

A mining company is considering a new project. Because the mine has received a perme, the project would be legal; but it would ce sindicant harm to a newby ver. The firm could spend an

additional $0.66 milion at Year 0 to mitigate the environmental problem, but it would not be required to do so. Developing the mine (without mtigation) would require an initial outley of $57

milion, and the expected cash inflows would be $19 million per year for 5 years. If the fem does invest in migation, the annual indows would be $20 milion. The risk-adjusted WACC is 14%.

a. Calculate the NPV and IRR with mitigation Enter your answer for NPV in illons. For example, an aner of $10,550,000 should be entered as 10.55. Do not round intermediate

calculations. Round your answers to two decimal places

NPV: $

milion

TRR:

Calculate the NPV and IRR without mitigation Enter your fr

calculations. Round your answers to two decimal places

NPV: $

ans. For example, an answer of $30,350,000 whild be entered a 10.55. Do not round intermediate

b. How should the environmental affects be dealt with when this project is vald

1. The environmental effects not mitigated could result in additional loss of cash flows and/or fines and pensities due to il will among customers, community, etc. Therefore,

even though the mine is legal without mitigation, the company needs to make sure that they have anticipated all costs in the "no mitigation analysis from not doing the

environmental mitigation.

II. The environmental effects should be ignored since the mine is legal without mitigation

III. The environmental effects should be treated as a surk cost and therefore ignored.

IV. The environmental effects not mitigated result in additional cash flows. Therefore, since the mine is legal without mitigation, there are no benefits to performing a "no

mitigation analysis

V. The environmental effects should be treated as a remote possibility and should only be considered at the time in which they actually occur.

Det

c. Should this project be undertaken?