8. Problem 11.08 (Capital Budgeting Criterla: Ethical Considerations) A mining company is considering a new project. Because the mine has recolved a permit, the project would be legal; but it would causil signilleant harm to a nearby river. The fin could spend an additional $10.33 million at Year 0 to mitigate the environmental problem, but it would not be required to do so. Developing the mine (without migation) wauld require an initial outiay of $63 million, and the expected cash inflows would be $21 malion per year for 5 years. If the firm does invest in mitigation, the annuat infows would be $22 million. The risk-adjusted WACC is 11% : a. Calculate the NPV and IRR with mitigation. Enter your answer for NPV in millions. For example, an answer of 510,550,000 should be antered as 10.55. Do not mund intermediate calcutations. Round your answers to two decimal places. NPV: $ milison IRR: Calculate the NPV and IRR without mitigation. Enter your answer for NPV in mill cns. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answers to two decimal places. NPV: 5 mition IRR: b. How should the environmental effecte be deait with when this project is eviloated? 1. The environmental effects if not migated could result in additional loss of cash flows and/or fines and penaites due to iil will among customera, comminity, etc. Therefore, even though the mine is legat without mitigation, the company noeds to make sure that they have anticipated all costs in the "no mikigation" analysis from not doing the environmental mitigation. It. The environmentat effects should the ignored since the mine is legal without mibgation. III. The environmenkal effects should be treated as a runk cost and therefore ignored. IV. The environmental effects if not migigsed would result in additional cash flows. Theretore; since the mine is legal without mitigabion, there are no benefts to performing a "no mitigation" analysss V. The environmental effects should be treated as a remote possibility and should only be considered at the time in wituch they actually occurt. b. How should the environmental effects be deak with when this project is evaluated? 1. The environmental effects if not mitigated could result in additional loss of cash flows and/or fines and penalties doe to ill will among custiomeni, community. etc. Therefore, even though the mine is legal without mitigation, the company needs to make sure that they have antiopated all coste in the "no mitigation" analysis from not doing the environmental mitigation. II. The environmental effects should be ignored since the mine is legal without mitigation. III. The environmental effects should be treated as a sunk cost and therefore ignored. TV. The environmental effects if not mitigated would result in addational cash flows. Therefore, since the mine is legal without mitigation, there are no benefits to performing a "no mitigation" analysis. V. The environmental effects should be treated as a remote possibility and should only be considered at the time in which they actialiy occur, c. Should this project be undertaken? If so, should the firm do the mitigation? 1. Under the assumption that all costs have been considered, the company would fot mitigate for the environmental impact of the prosect since its tas without mitigation is greater than its IRR when mitigation costs are included in thet analyis. II. Under the assumption that all costs have been considered, the company would mibgate for the environmental impact of the preject aince its NPV with mitigation is greater than its NPV when mitigation costs are not induded in the analysa. III. Undar the assumption that all costs have been considered, the company would not mitigate for the etivironmental impoct of the praject airce its NpV without mitigation is greater than its NPV when mitigation 'costs are included in the analysts. TV, Under the assumption that all costs have been considered, the company would mitlqste for the temironmental impoct of the project since its 189 with mitigation is greater than its IRR when mitigation costs are not included in the analysis.? V. Under the assumption that all costs pave been considered. the company would not misigate for the enviranmental impact of the prejoct wince its N2V with m tigation is greater than its NPV when mitigation costs are fot induded in the anaiplit The environmental effects if not mitigated would result in additional cash flows. Therefore, since the mine performing a "no mitigation" analysis. V. The environmental effects should be treated as a remote possibility and should only be considered at the th c. Should this project be undertaken? Select. The project should not be undertaken under the "no mitigation" assumption. The project should be undertaken only under the "no mitigation" assumption. The project should not be undertaken under the "mitigation" assumption. Even when mitigation is considered the project has a positive NPV, so it should be undertaken. y would not mitigate for the enviro Even when mitigation is considered the project has a positive IRR, so it should be undertaken. the analysis. II. Under the assumption that all costs have been considered, the company would mitigate for the environme mitigation 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 envirc 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 environm: 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 envirc mitigation is greater than its NPV when mitigation costs are not included in the analysis