Than the companys cost of capital problem 11 9

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than the company’s cost of capital. PROBLEM 11-9 CAPITAL BUDGETING CRITERIA: ETHICAL CONSIDERATIONS An electric utility is consid-ering 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, the 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 do so. The plant without mitigation would cost $240 million, and the expected cash inflows would be $80 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $84 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 17%. a. Calculate the NPV and IRR with and without mitigation. b. How should the environmental effects be dealt with when evaluating this project? c. Should this project be undertaken? If so, should the firm do the mitigation?
sure that they have anticipated all costs in the “no mitigation” analysis from not doing theenvironmental mitigation. c/ Even when mitigation is considered the project has a positive NPV, so it should be undertaken.The question becomes whether you mitigate or don’t mitigate for environmental problems.Under the assumption that all costs have been considered, the company would not mitigate forthe environmental impact of the project since its NPV is $12.10 million vs. $5.70 million whenmitigation costs are included in the analysis.

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