Question
Consider a plan to build a plant that will cost $250 million and generate cash flows of $75 million per year for the next 5
Consider a plan to build a plant that will cost $250 million and generate cash flows of $75 million per year for the next 5 years. If the WACC is 13%, the net present value (NPV) of the plant project would be $13.79 million. However, the plant causes pollution and environmental damages that could be mitigated by spending $52 million upfront. This would cause the plant to generate cash flows each year of $82 million rather than $75 million. If the pollution and environmental damages created by the plant do not exceed legal limits, what can we conclude about the plant project?
A. The net present value with mitigation would be negative so the plant will not open.
B. The net present value with mitigation will be negative but the plant will still open and choose to pollute and damage the environment within the limits of the law.
C. Even though the net present value with mitigation will be negative, the plant will open and will choose to mitigate the damages.
D. The net present value with mitigation is still positive so the plant will choose to mitigate the damages.
E. Although the net present value with mitigation is still positive, the plant operators will choose not to mitigate because the net present value is higher without mitigation.
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