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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 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 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 17%. a. Calculate the NPV and IRR with and without mitigation. b. How should the environmental effects be dealt with when evaluating this project? c. Should this project be undertaken? If so, should the firm do the mitigation? Why or why not?

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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250
BuyFind

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250

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Chapter
Section
Chapter 11, Problem 9P
Textbook Problem

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 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 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 17%.

  1. a. Calculate the NPV and IRR with and without mitigation.
  2. b. How should the environmental effects be dealt with when evaluating this project?
  3. c. Should this project be undertaken? If so, should the firm do the mitigation? Why or why not?

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Chapter 11 Solutions

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Ch. 11 - How are project classifications used in the...Ch. 11 - What are three potential flaws with the regular...Ch. 11 - Why is the NFV of a relatively long-term project...Ch. 11 - What is a mutually exclusive project? How should...Ch. 11 - If two mutually exclusive projects were being...Ch. 11 - Discuss the following statement: If a firm has...Ch. 11 - Why might it be rational for a small firm that...Ch. 11 - Project X is very risky and has an NPV of 3...Ch. 11 - What reinvestment rate assumptions are built into...Ch. 11 - A firm has a 100 million capital budget. It is...Ch. 11 - NPV Project L costs 65,000, its expected cash...Ch. 11 - IRR Refer to problem 11-1. What is the projects...Ch. 11 - MIRR Refer to problem 11-1. What is the projects...Ch. 11 - PAYBACK PERIOD Refer to problem 11-1. What is the...Ch. 11 - DISCOUNTED PAYBACK Refer to problem 11-1. What is...Ch. 11 - NPV Your division is considering two projects with...Ch. 11 - CAPITAL BUDGETING CRITERIA A firm with a 14% WACC...Ch. 11 - CAPITAL BUDGETING CRITERIA: ETHICAL CONSIDERATIONS...Ch. 11 - CAPITAL BUDGETING CRITERIA: ETHICAL CONSIDERATIONS...Ch. 11 - CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE...Ch. 11 - CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE...Ch. 11 - IRR AND NPV A company is analyzing two mutually...Ch. 11 - MIRR A firm is considering two mutually exclusive...Ch. 11 - CHOOSING MANDATORY PROJECTS ON THE BASIS OF LEAST...Ch. 11 - NPV PROFILES: TIMING DIFFERENCES An oil-drilling...Ch. 11 - NPV PROFILES: SCALE DIFFERENCES A company is...Ch. 11 - CAPITAL BUDGETING CRITERIA A company has an 11%...Ch. 11 - NPV AND IRR A store has 5 years remaining on its...Ch. 11 - MULTIPLE IRRS AND MIRR A mining company is...Ch. 11 - NPV A project has annual cash flows of 5,000 for...Ch. 11 - MIRR Project A costs 1,000, and its cash flows are...Ch. 11 - MIRR A project has the following cash flows: This...Ch. 11 - CAPITAL BUDGETING CRITERIA Your division is...Ch. 11 - BASICS OF CAPITAL BUDGETING You recently went to...

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