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 $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%. a. Calculate the NPV and IRR with and without mitigation. b. How should the environmental effects be dealt with when this project is evaluated? c. Should this project be undertaken? If so, should the firm do the mitigation?
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 $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%. a. Calculate the NPV and IRR with and without mitigation. b. How should the environmental effects be dealt with when this project is evaluated? c. Should this project be undertaken? If so, should the firm do the mitigation?
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
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Transcribed Image Text:**Capital Budgeting Criteria: Ethical Considerations**
A mining company is considering a new project. Although the mine has received a permit and the project would be legal, it is anticipated to cause significant harm to a nearby river. To address this environmental issue, the company could spend an additional $10 million at Year 0 for mitigation, although it is not required to do so.
Developing the mine without mitigation would cost $60 million, and the expected cash inflows would be $20 million annually for 5 years. If the firm invests in mitigation, the annual inflows would increase to $21 million. The risk-adjusted Weighted Average Cost of Capital (WACC) is 12%.
**Questions:**
a. Calculate the Net Present Value (NPV) and Internal Rate of Return (IRR) with and without mitigation.
b. How should the environmental effects be dealt with when this project is evaluated?
c. Should this project be undertaken? If so, should the firm invest in mitigation?
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