16. Problem 11.09 (Capital Budgeting Criteriat Ethical Considerations) CO Book An electric verty 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 additionat 340 million at Year to mitigate the environmental problem, but it would not be required to do so. The plant without moitition would require an tretiel outlay of $270.70 milion, and the expected cash flows would be 190 milion per year for 5 years. If the firm doel invest in mitigation, the annual inflows would b4 893.35 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 18% Calculate the NPV and with mitigation. Enter your answer for NPV in million. For example, an answer of $10,550,000 should be entered a 10.55. Negative values, in any, should be indicated by a minus sign. Do not round Intermediate calculations. Round your answers to two decimal places NPV: million TRR Calculate the NPV and Tee without mitigation, Inter your answer for pv in million. For example, an answer of 610,550,000 should be entered as 10.85. Negative valut, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to two decimal places NPVIS million IRR b. How should the environmental effects be dealt with when evaluating this project? 1. 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 all will for not mitigating for the environmental effects have been considered in the original analysis. 11. The environmental effects should be treated as a remote possibility and should only be considered at the time in which they actually occur. III. The environmental effects it not mitigated would result in additional cash flows. Therefore, soce the plant is legal without mitigation, there are no benefits to performing ano mitigation analysis IV. The environmental effects should be ignored since the plant is legal without mitigation V. The environmental effects should be treated as a sunk cost and therefore ignored c. Should this project be undertaken? 1. The project should be undertaken since the IRR is positive under both the "mitigation and no mitigation" assumptions 11. The project should be undertaken since the NPV is positive under both the "mitigation and no mitigation assumptions. m. Even when no mitigation is considered the project has a negative NPV, so it should not be undertaken. IV. The project should be undertaken only if they do not mitigate for the environmental effects. However, they have to make sure that they ve done the analysis property to avoid any al will and additional costs that might result from undertaking the project without concern for the environmental impacts. V. The project should be undertaken only under the mitigation assumption
