# C if the projects are mutually exclusive which would

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c/ If the projects are mutually exclusive, which would you recommend?
d/ Notice that the projects have the same cash flow timing pattern. Why is there aconflict between NPV and IRR?
Problem11-8 CAPITAL BUDGETING CRITERIA: ETHICAL CONSIDERATIONS A mining company is con-sidering 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? 5 5 /
NPV = -\$10 + \$21 / (1+IRR) 1 + \$21 / (1+IRR) 2 + \$21 / (1+IRR) 3 + \$21 / (1+IRR) 4 + \$21 / (1+IRR) 5 = 0 => IRR = 15.24% NPV and IRR without mitigation: NPV = CF 0 + CF 1 / (1+r) 1 + CF 2 / (1+r) 2 + CF 3 / (1+r) 3 + CF 4 / (1+r) 4 + CF 5 / (1+r) 5 NPV = -\$60,000,000 + \$20,000,000 / (1+12%) 1 + \$20,000,000 / (1+12%) 2 + \$20,000,000 / (1+12%) 3 + \$20,000,000 / (1+12%) 4 + \$20,000,000 / (1+12%) 5 = \$12,095,524.05 NPV = CF 0 + CF 1 / (1+IRR) 1 + CF 2 / (1+IRR) 2 + CF 3 / (1+IRR) 3 + CF 4 / (1+IRR) 4 + CF 5 / (1+IRR) 5 = 0 NPV = -\$10 + \$21 / (1+IRR) 1 + \$21 / (1+IRR) 2 + \$21 / (1+IRR) 3 + \$21 / (1+IRR) 4 + \$21 / (1+IRR) 5 = 0 => IRR = 19.86% b. Environmental effects could be added by estimating penalties or any other cash outflowsthat might be imposed on the company. These outflows could be so large as to cause theproject to have a negative NPV, in which case the project should not be undertaken. c. The project without mitigation should be undertaken because NPV without mitigation is higher than NPV with mitigation, its NPV is positiveand its IRR is greater
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