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 earby river. The firm could spend an additional $10 million at Year 0 to mitigate the environmental problern, but it would not be required to do so. Developin je mine (without mitigation) would require an initial outioy of $60 million, and the expected cash inflows would be $20 million per year for 5 years. If the firm oes invest in mitigation, the annual inflows would be $21 million. The risk-adjusted WACC is 11%. 1. 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. Do not round intermediate calculations. Round your answers to two decimal places: NPV: $ million IRR: Calculate the NPV and IRR without mitigotion. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answers to two decimal places. NPV:s milion b. How should the environmental effects be dealt with when this project is evaluated? 1. The environmental effects if not mitigated could result in addational loss of cash flows and/or fines and penalties due to ill wilf 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 environtiental mitigation. 11. The environmental effects should be ignored since the mine is legal without mitigation. IIt. The environmental effects should be treated as a sunk cost and therefore ignored. IV. The environmental effects if not mitigated would result in additional cash fows. Therefore, since the mine is legal without mitigation, there are no benefits to performing a "no mitigation" analysis. v. The environmental effects should be treated as a remote possiblity and should only be considered at the time in which they actually occur. c. Should this project be undertaken? If so, should the firm do the mitigation? 1. Under the assumption that ail 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 inctuded in the analysis. II. Under the assumption that all costs have been considered, the company would mitigate for the environmentail impact of the project sjince its NPV with mitigation is greater than its NPV when mitigation costs are not included in the analysis. III. 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. IV. Under the assumption that all costs have been considered, the company would mitigate for the environmental impact of the project since its IRR with mitigotion is greater than its thR when mitigation costs are not included in the analysis. v. 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
