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 Year $0$ to mitigate the environmental problem, but it would not be required to do so$.$ The plant without mitigation would require an initial outlay

of $$270\mathrm{.}34$ million, and the expected cash inflows would be $$90$ million per year for $5$ years. If the firm does invest in mitigation, the annual inflows would

be $$94\mathrm{.}47$ 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 $19\%.$

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 $10\mathrm{.}55.$

Negative 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:

$\%$

Calculate the NPV and IRR without mitigation. Enter your answer for NPV in millions. For example, an answer of $$10,550,000$ should be entered as

$10\mathrm{.}55.$ Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to two decimal places.

b$.$ How should the environmental effects be dealt with when evaluating this project?

I. The environmental effects if not mitigated would result in additional cash flows. Therefore, since the plant is legal without mitigation, there are no

benefits to performing a $"$no mitigation" analysis.

II$.$ The environmental effects should be ignored since the plant is legal without mitigation.

III. The environmental effects should be treated as a sunk cost and therefore ignored.

IV$.$ If the utility mitigates for the environmental effects, the project is not acceptable. However, before the company chooses to do the project without

mitigation, it needs to make sure that any costs of "ill will" for not mitigating for the environmental effects have been considered in the original

analysis.

V$.$ The environmental effects should be treated as a remote possibility and should only be considered at the time in which they actually occur.