5. Problem 11.08 (Capital Budgeting Criteria: Ethical Considerations) A mining company is considering a new project. Becsuse the mine has received a permit, the project would be legal; but it would cause sign iticant harm to a nearby river. The firm could spend an additional 59 million at Year 0 to mitigate the environmental Problem, but it would not be required to do so. Developing the mine (without mitigution) would require an inital cutlay of 451 milion, and the expected cash inflows would be $17 million per year for 5 years. If the firm does iovest in miligation, the annual infiows would be $18 minion, The risk-adjusted WACC is 12%. a. Calculate the NPY and IRR: with mitigation. Enter your answer for NPV in millions. For example, an answer of 510,550,000 should be entered as 10.55. Do not round intermed ate calculations. Rlound your answers to two decimal places. Calculate the Niv and 1RR without mitigation. Enter your answer for NpV in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediath calculations, Rovnd your answers to two decimal piaces. NSY: 3 miltion IRR: b. How should the environmental effects be dealt with when this project is evalusted? 1. The efivironmental effects if not mitigated could result in additional loss of cash fows and/or fines and penalties due to itil wor among custamers, community, etc. Therefore, even thosgh the mine is logal whthout mitigstico, the compuny needs to make sure that they have anticipated all coste in the "no mitigution" anaysis from not doing the environmental mitigation. 11. The environmental effects thould be ignored since the mine is legal without mitigation. 1i1. The environmental effects should be treated as a sunk cost and therefore ignored. performing o "no mitigation" analysis. V. The environmental effects should be treated as a remote ponvbity and should snly be considered at the time in atich ither actually occur. project be undertaken? c. Should this project be undertaken? - Seleet- The project should not be undertaken under the "no mitigabion" assumption. The project should be undertaken only under the "no mitigation" assumption. The profect should not be undertaken under the "mitigation" assumption. Even when mitigation is considered the project has a positive NPV, so it should be undertaken. the analysis. Even when mivigation is considored tho project hes a positive las, so it ahould be undertaken. y would mitigate for the environmental impact of the project sine 13 greater than iss ivry wnern mungation costs are noc inciuned in ine analysis. 1I1. Under the assumption that all costs have been considered, the company would not mitigate for the environmental impact of the project mitigation is greater than its NPV when mitigation costs are included in the analysis. IV. Under the assumption that all costs have been considered, the company would mitigate for the environmental impact of the project sinc is greater than its IRR when mitigation costs are not included in the analysis. V. Under the assumption that all costs have been considered, the company would not mitigate for the environmental impact of the project: mitigation is greater than its NPV when mitigation costs are not included in the analysis. If so, should the firm do the mitigation? 1. Under the assumption that all costs have been considered, the company would not mitigate for the environmental impact of the project since its IRR without mitigation is greater than its IRR when mitigation costs are included in the analysis. It. Under the assumption that all costs have been considered, the company would mitigate for the environmental impact of the project since its NPV with mitigatio is greater than its NPV when mitigation costs are not included in the analysis. III. Under the assumption that all costs have been considered, the company would not mitigate for the environmental impact of the project since its NPV without mitigation is greater than its NPV when mitigation costs are included in the analysis. TV. Under the assumption that all costs have been considered, the company would mitigate for the environmental impact of the project since its IRR with mitigation is greater than its iRR when mitigation costs are not included in the analysis. V. Under the assumption that all costs have been considered, the company would not mitigate for the environmental impsct of the groject since its NFV with mitigation is greater than its NPV when mitigation costs are not included in the analysis