A mining company is considering a new project. Because the mine has received a p
ID: 2732735 • Letter: A
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 $25 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 $95 million, and the expected cash inflows would be $45 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $42 million. The risk-adjusted WACC is 14.00%. a. Calculate the NPV without mitigation. b. Calculate the NPV with mitigation.
Explanation / Answer
a) NPV without mitigation Initial investment 95 million Cash Inflows 45 million Number of years 5 WACC 14% then NPV = CF * (1 - ( 1+I)-n) / I - initial investment = 45 *(1 - (1 + 0.14)-5)/0.14 - 95 = 45 * ( 1 - 0.5194) /0.14 - 95 = 45 * 0.4806/0.14 - 95 = 45 * 3.4329 - 95 = 154.48 - 95 = 59.48 b) NPV with mitigation Initial investment 120 million Cash Inflows 42 million Number of years 5 WACC 14% then NPV = CF * (1 - ( 1+I)-n) / I - initial investment = 42 *(1 - (1 + 0.14)-5)/0.14 - 120 = 42 * ( 1 - 0.5194) /0.14 - 120 = 42 * 0.4806/0.14 - 120 = 42 * 3.4329 - 120 = 144.18 - 120 = 24.18
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