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 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 14%.
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 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 14%.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Please refer to picture for the complete question.
Please answer parts A and B
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
Transcribed Image Text:a. Calculate the NPV and IRR with mitigation. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round
intermediate calculations. Round your answers to two decimal places.
NPV: $
million
IRR:
%
Calculate the NPV and IRR without mitigation. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round
intermediate calculations. Round your answers to two decimal places.
NPV: $
million
IRR:
%
b. How should the environmental effects be dealt with when this project is evaluated?
I. The environmental effects if not mitigated could result in additional loss of cash flows and/or fines and penalties due to ill 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 sunk cost and therefore ignored.
IV. The environmental effects if not mitigated would 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.
-Select- v
c. Should this project be undertaken?
-Select-
If so, should the firm do the mitigation?
I. Under the assumption that all costs have been considered, the company would not mitigate for the environmental impact of the project since its IRR without mitigation
is greater than its IRR when mitigation costs are included in the analysis.
II. Under the assumption that all costs have been considered, the company would mitigate for the environmental impact of the project since its NPV with mitigation is
greater than its NPV when mitigation costs are not included in the analysis.
III. Under the assumption that all costs have been considered, the company would not mitigate for the environmental impact of the project since its NPV without mitigation
is greater than its NPV when mitigation costs are included in the analysis.
IV. Under the assumption that all costs have been considered, the company would mitigate for the environmental impact of the project since its IRR with mitigation is
greater than its IRR when mitigation costs are not included in the analysis.
V. Under the assumption that all costs have been considered, the company would not mitigate for the environmental impact of the project since its NPV with mitigation is
greater than its NPV when mitigation costs are not included in the analysis.
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