Question

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 net 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%.

1. Calculate the NPV and IRR with mitigation. Round your answers to two decimal places. Enter your answer for NPV in millions.
2. Calculate the NPV and IRR without mitigation. Round your answers to two decimal places. Enter your answer for NPV in millions.

Answer 1

1. Calculate the NPV and IRR with mitigation. Round your answers to two decimal places. Enter your answer for NPV in millions.

• NPV = $2.39 million
• IRR = 15.24%

2. Calculate the NPV and IRR without mitigation. Round your answers to two decimal places. Enter your answer for NPV in millions.

• NPV = $9.96 million
• IRR = 19.86%

Step-by-step explanation:

1) initial cost $80 million

expected cash flows $24 during the next 5 years

WACC = 14%

using a financial calculator (or excel spreadsheet),

NPV = $2.39 million

IRR = 15.24%

2) initial cost $69 million

expected cash flows $23 during the next 5 years

WACC = 14%

using a financial calculator (or excel spreadsheet),

NPV = $9.96 million

IRR = 19.86%