CAPITAL BUDGETING CRITERIA: ETHICAL CONSIDERATIONS An electric utility is consid
ID: 2657963 • Letter: C
Question
CAPITAL BUDGETING CRITERIA: ETHICAL CONSIDERATIONS
An electric utility is considering 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 $240.73 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 $84.54 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 19%.
Calculate the NPV and IRR with mitigation. Round your answers to two decimal places. Enter your answer for NPV in millions. Do not round your intermediate calculations. For example, an answer of $10,550,000 should be entered as 10.55. Negative value should be indicated by a minus sign.
NPV $ million
IRR %
Calculate the NPV and IRR without mitigation. Round your answers to two decimal places. Enter your answer for NPV in millions. Do not round your intermediate calculations. For example, an answer of $10,550,000 should be entered as 10.55.
NPV $ million
IRR %
Explanation / Answer
With Mitigation
Year
cash flow
present value of cash flow = cash flow/(1+r)^n r= 19%
0
-280730000
-280730000
1
84540000
71042016.8
2
84540000
59699173.8
3
84540000
50167372.9
4
84540000
42157456.2
5
84540000
35426433.8
NPV
sum of present value of cash flow
-22237546
IRR
Using IRR function in MS excel
15.40%
With out Mitigation
Year
cash flow
present value of cash flow = cash flow/(1+r)^n r= 19%
0
-240730000
-240730000
1
80000000
67226890.8
2
80000000
56493185.5
3
80000000
47473265.1
4
80000000
39893500.1
5
80000000
33523949.7
NPV
sum of present value of cash flow
3880791.19
IRR
Using IRR function in MS excel
19.72%
With Mitigation
Year
cash flow
present value of cash flow = cash flow/(1+r)^n r= 19%
0
-280730000
-280730000
1
84540000
71042016.8
2
84540000
59699173.8
3
84540000
50167372.9
4
84540000
42157456.2
5
84540000
35426433.8
NPV
sum of present value of cash flow
-22237546
IRR
Using IRR function in MS excel
15.40%
With out Mitigation
Year
cash flow
present value of cash flow = cash flow/(1+r)^n r= 19%
0
-240730000
-240730000
1
80000000
67226890.8
2
80000000
56493185.5
3
80000000
47473265.1
4
80000000
39893500.1
5
80000000
33523949.7
NPV
sum of present value of cash flow
3880791.19
IRR
Using IRR function in MS excel
19.72%
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