CAPITAL BUDGETING CRITERIA: ETHICAL CONSIDERATIONS 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. Developing the mine (without mitigation) would cost $60 million, and the expected cash inflows would be $20 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $21 million. The risk-adjusted WACC is 12%. a. Calculate the NPV and IRR with and without mitigation. b. How should the environmental effects be dealt with when this project is evaluated? c. Should this project be undertaken? If so, should the firm do the mitigation?
CAPITAL BUDGETING CRITERIA: ETHICAL CONSIDERATIONS 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. Developing the mine (without mitigation) would cost $60 million, and the expected cash inflows would be $20 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $21 million. The risk-adjusted WACC is 12%. a. Calculate the NPV and IRR with and without mitigation. b. How should the environmental effects be dealt with when this project is evaluated? c. Should this project be undertaken? If so, should the firm do the mitigation?
Fundamentals of Financial Management, Concise Edition (MindTap Course List)
9th Edition
ISBN:9781305635937
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Eugene F. Brigham, Joel F. Houston
Chapter11: The Basics Of Capital Budgeting
Section: Chapter Questions
Problem 8P
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Transcribed Image Text:CAPITAL BUDGETING CRITERIA: ETHICAL CONSIDERATIONS 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. Developing the mine (without mitigation) would cost $60 million,
and the expected cash inflows would be $20 million per year for 5 years. If the firm does
invest in mitigation, the annual inflows would be $21 million. The risk-adjusted WACC
is 12%.
a. Calculate the NPV and IRR with and without mitigation.
b. How should the environmental effects be dealt with when this project is evaluated?
c. Should this project be undertaken? If so, should the firm do the mitigation?
11-8
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