A mining company is considering a new project. Because the mine has received a p

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 $9.33 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 $54 million, and the expected net cash inflows would be $18 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $19 million. The risk adjusted WACC is 12%.

Calculate the NPV and IRR with mitigation. Round your answers to two decimal places. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55.
NPV $_______ million
IRR _________%

Calculate the NPV and IRR without mitigation. Round your answers to two decimal places. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55.
NPV $________ million
IRR __________%

Explanation / Answer

Calculate the NPV and IRR with mitigation. Round your answers to two decimal places. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55.

NPV = - Initial Investment + Annual Cash Flow*PVIFA(rate,nper)

NPV = -(54+9.33) + 19*PVIFA(12%,5)

NPV = -63.33 + 19*3.604776

NPV = $ 5.16 Million

At IRR , NPV =0

NPV = - Initial Investment + Annual Cash Flow*PVIFA(rate,nper)

0 = -(54+9.33) + 19*PVIFA(IRR,5)

PVIFA(IRR,5) = 63.33 / 19

PVIFA(IRR,5) = 3.333158

IRR = 15.24%

Answer

NPV = $ 5.16 Million

IRR = 15.24%

Calculate the NPV and IRR without mitigation. Round your answers to two decimal places. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55.

NPV = - Initial Investment + Annual Cash Flow*PVIFA(rate,nper)

NPV = -54 + 18*PVIFA(12%,5)

NPV = -54 + 18*3.604776

NPV = $ 10.89 Million

At IRR , NPV =0

NPV = - Initial Investment + Annual Cash Flow*PVIFA(rate,nper)

0 = -54 + 18*PVIFA(IRR,5)

PVIFA(IRR,5) = 54/18

PVIFA(IRR,5) = 3

IRR = 19.86%

Answer

NPV = $ 10.89 Million

IRR = 19.86%

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