Nelectric 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 $270.34 million, and the expected cash inflows would be $90 million per year for 5 years. if the firm does invest in mitigation, the annual inflows would be $94.34 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 16%. calculate the npv and irr with mitigation. round your answers to two decimal places. enter your answer for npv in millions. for example, an answer of $10,550,000 should be entered as 10.55. npv $ million irr % calculate the npv and irr without mitigation. round your answers to two decimal places. enter your answer for npv in millions. for example, an answer of $10,550,000 should be entered as 10.55. npv $ million irr %

Ans.

Without Mitigation: NPV=$24.35 ; IRR=19.80%

With Mitigation: NPV= -$1.04 ; IRR=15.80%

Explanation:

Hi, as you can see, this project without mitigation is financially better than the option of investing on the environmental mitigation, but since the "mitigation" alternative is so close NPV=0, do consider to implement the mitigation option, this is because it would only take some adjustments (I think) to get the NPV = 0 and you will avoid future lawsuits, this is always something to be consider in this type of projects. Now, the math to this, in the case of the NPV, is as follows.

The IRR of both options is also something to be consider, in the case of this project without mitigation actions the IRR=19.80%, this means that if our discount rate was 19.80% instead of 16%, this option would provide a NPV=0 (therefore this project is suitable for investing). If the project is to implement the environmental actions the IRR=15.80%, this means that if our WACC was 15.80% instead of 16%, this option is worth considering since it is returning to the investors exactly what they ask for their money. I really don´t think this project should use the same WACC due to the legal risk of not taking environmental actions. (this is just something to consider, my opinion).

The way to find IRR is with a calculator or MS Excel with its fuction "IRR". For further clarification on this, please download the Excel sheet attached to this answer.

Best of luck.

no, a company likes to look at potential employees that are professional, well mannered, clean, honest, etc. don't show up looking/acting like a clown. (unless that's your job xd) hope this ! =^-^=

answer; correct answer is investing activity;