An electric 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 the year 0 to mitigate the environmental problem, but it would not be required to do so. The plant without mitigation would cost $240 million, and the expected cash inflows would be $80 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $84 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 17%.

Calculate the NPV and IRR with and without mitigation.

How should the environment effects be dealt with when evaluating this project?

Should this project be undertaken? If so, the firms do the mitigation? Why or why not?

A firm with a WACC of 10% is considering the following mutually exclusive projects

0________1_________2_________3__________4____

Project S 1000 870 250 25 25

Project L 1000 0 250 400 845

Which project would you recommend? Explain