1. You can pay a pollution tax (one time) of $13m immediately.

2. You can close the plant and install a power cable from the mainland. That will cost you $1m at the end of this year, $3m at the end of next year (construction costs) and then $1m forever after that for maintenance.

3. You can retrofit the plant switch scrubbers to reduce the emissions. That will cost $7.5m at the end of this year and $.01m for the next 50 years for maintenance.

Market Conditions

The current market conditions have a 12 percent market risk premium on the powerplant with the risk-free rate being 5-percent. The local government has a fixed tax rate of 35 percent. Senior management will ask about the cost to raise capital and we will have to calculate the WACC. The current capital structure of the company is as follows: Debt 7,000 outstanding bonds, at 7.5% coupon and 20 years to maturity. These bonds pay interest semiannually and quoted a price of 108 percent of par. Common Stock -180,000 shares outstanding, selling for $50 per share: Beta .90. Preferred Stock 8,000 shares of 5.5 percent preferred stock outstanding, currently selling for $95.00 per share.

Which alternative world you choose?

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