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 cost $239.99 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 $83.96 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 16%.

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

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

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

C. 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 that analysis.

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

E. 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.

Should this project be undertaken?

A. The project should be undertaken only under the "mitigation" assumption.

B. The project should be undertaken since the IRR is positive under both the "mitigation" and "no mitigation" assumptions.

C. The project should be undertaken since the NPV is positive under both the "mitigation" and "no mitigation" assumptions.

D. Even when no mitigation is considered the project has a negative NPV, so it should not be undertaken.

E. The project should be undertaken only if they do not mitigate for the environmental effects. However, they want to make sure that they've done the analysis properly due to any "ill will" and additional "costs" that might result from undertaking the project without concern for the environmental impacts.

Project S costs $11,000 and its expected cash flows would be $4,000 per year for 5 years. Mutually exclusive Project L costs $28,500 and its expected cash flows would be $10,800 per year for 5 years. If both projects have a WACC of 15%, which project would you recommend?

Select the correct answer.

I. Neither S or L, since each project's NPV < 0.

II. Both Projects S and L, since both projects have NPV's > 0.

III. Both Projects S and L, since both projects have IRR's > 0.

IV. Project S, since the NPVS > NPVL.

V. Project L, since the NPVL > NPVS.

A company is analyzing two mutually exclusive projects, S and L, with the following cash flows:

0

1

2

3

4

Project S	-$1,000	$878.76	$240	$5	$15
Project L	-$1,000	$10	$250	$380	$815.64

The company's WACC is 8.0%. What is the IRR of the better project? (Hint: The better project may or may not be the one with the higher IRR.) Round your answer to two decimal places.

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Banyan Co.s common stock currently sells for $51.25 per share. The growth rate is a constant 7.8%, and the company has an expected dividend yield of 2%. The expected long-run dividend payout ratio is 35%, and the expected return on equity (ROE) is 12%. New stock can be sold to the public at the current price, but a flotation cost of 10% would be incurred. What would be the cost of new equity? Round your answer to two decimal places. Do not round your intermediate calculations.

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A mining company is considering a new project. Because the mine has received a permit, the project would be legal; but it would cause significant harm to a nearby river. The firm could spend an additional $9.33 million at Year 0 to mitigate the environmental Problem, but it would not be required to do so. Developing the mine (without mitigation) would cost $54 million, and the expected net cash inflows would be $18 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $19 million. The risk-adjusted WACC is 12%.

How should the environmental effects be dealt with when this project is evaluated?

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

B. The environmental effects if not mitigated would result in additional cash flows. Therefore, since the mine is legal without mitigation, there are no benefits to performing a "no mitigation" analysis.

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

D. The environmental effects if not mitigated could result in additional loss of cash flows and/or fines and penalties due to ill will among customers, community, etc. Therefore, even though the mine is legal without mitigation, the company needs to make sure that they have anticipated all costs in the "no mitigation" analysis from not doing the environmental mitigation.

E. The environmental effects should be ignored since the mine is legal without mitigation.

Should this project be undertaken? A. The project should be undertaken only under the "no mitigation" assumption.

B. The project should not be undertaken under the "mitigation" assumption.

C. Even when mitigation is considered the project has a positive NPV, so it should be undertaken.

D. Even when mitigation is considered the project has a positive IRR, so it should be undertaken.

E. The project should not be undertaken under the "no mitigation" assumption.Item 6

If so, should the firm do the mitigation?

A. 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.

B. Under the assumption that all costs have been considered, the company would mitigate for the environmental impact of the project since its NPV with mitigation is greater than its NPV when mitigation costs are not included in the analysis.

C. 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.

D. 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.

E. Under the assumption that all costs have been considered, the company would not mitigate for the environmental impact of the project since its NPV with mitigation is greater than its NPV when mitigation costs are not included in the analysis.