An electric ublity 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 recelved a permit, the plant would be legal; but it would cause some alr pollution. The company could spend an additional $40 million at Year 0 to mitigate the environmental oroblern, but it would not be required to do so. The plant without mitigation would require an initial outiay of $210.17 million, and the expected cash inflows would be $70 milion per year for 5 years. If the firm does invest in mitigation, the annual infiows would be $75.27millon, Unemployment in the area where the plant would be built is high, and the olant would provide about 350 good jobs. The risk adfusted wACC is 19%. a. Calculate the NPV and IRR with mitigation. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not round intermediate cakulations. Alound your answers to two decimal places: NPV: $ milion IRR: Calculate the NPV and IRR without mitigation. Enter your answer for NPV in milions. For example, an answer of 510,550,000 should be entered as-10.55. Negative values, if any, should be indicated by a minus sign, Do not round intermediate casculations. Round your ansers to two decimat places values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to two decimal places. NPV: $ million IRR: b. How should the environmental effects be dealt with when evaluating this project? 1. The environmental effects should be treated as a sunk cost and therefore ignored. II. If the utility mitigates for the emvironmental effects, the project is not acceptable. However, before the company chooses to do the project without midgation, it needs to make sure that any costs of "iil will" for not mityating for the environmental effects have been considered in the original analysis. 1i1. The environmental effects should be treated as a remote possiblity and should only be considered at the time in which they actually occur. IV. The environmental effects it not mitigated would result in additional cash flows. Therefore, since the plant is legal without mitigation, there are no benefits to performing a "no mitigotion" anslysis. V. The envirenmental effects should be ignored since the plant is legal without mitigation. c. Should this project be undertaken? 1. The project should be undertaken since the NPV is positive under both the "mitigation" and "no mitigation" assumptions. II. Even when no mitigation is considered the project has a negative NPV, so it should not be undertaken. IIt. The project should be undertaken only if they do not mitigate for the environmental effects. However, they have to make sure that theyve done the analysis properly to avold any "ill wil" and additional "costs" that might result from undertaking the project without concem for the environmental impacts. IV. The project should be undertaken only under the "mitigation" assumption. V. The project should be undertaken since the IRR is positive under both the "mitigation" and "no mitigation" assumptions
