Question 12 0/1 pts A mining company is considering a new project. Because the m

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Question 12 0/1 pts 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 $10 million at year 0 to mitigate the environmental problem, but it would not be required to do so. However, if the firm does not deal with the problem at year 0 they would face a lawsuit at the end of the project (year 5) at a cost of $20 million. Developing the mine (without mitigation) would cost $60 million and the expected cash inflows would be $20 million for 5 years. The weighted average cost of capital (WACC) is 12%. Below is a summary of possible outcomes NPV with mitigation costs at time O included - $2.1 million NPV without mitigation costs at time O and a lawsuit included in year 5 = $0.75 million Should the project be undertaken? If so, should the firm do the mitigation at time O? Yes, the project should be undertaken and the mitigation expense should be conducted at time No, the project is too risky and should not be undertaken No, the NPV's are positive for every possible scenario. Yes, the project should be undertaken and no mitigation should be conducted at time 0

Explanation / Answer

(1) NPV of the project is Positive ( as provided in summary information) whether we mitigation cost is incurred at t = 0 or t = 5. So there is no question of rejecting the project.

(2) NPV is positively high when mitigation cost of 10 million is incurred at t = 0.

Analysis of these two facts from the given case indicates that .........

Statement - 1 : The project should be undertaken and mitigation expenses to be conducted at t = 0......... is best course of action for the company

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