The Project Options Option 1: Since the small island has been hurt by a downshift in tourism, we could help the economy by providing a one-time tax for the pollution. This would present an immediate Carbon Offset of $15,000,000. I know some of the senior members of the management would like to use this as a marketing tool and know the money could be used to help the local government fund items that were cut because of previous missed tax revenues from the lack of tourism to the island. Option 2: The powerplant could be shut down completely and we could install a power cable that runs from one of the other nearby islands that has a powerplant. This powerplant will still produce just as much pollution as the one on our island, but it is under a different government that does not care about air pollution. This would cost the cost our company $1,000,000 at the end of the year, $3,000,000 at the end of next year and $1,000,000 yearly thereafter for maintenance. Option 3: The powerplant can be retrofitted with scrubbers that can reduce the pollution emissions and make the powerplant green. The cost of this project would be $7,500,000 at the end of this year and $100,000 for the next 50-years for maintenance.

Market Conditions The current market conditions have a 12 percent market risk premium on the powerplant with the risk-free rate being 5-percent. The local government has a fixed tax rate of 36 percent. The current capital structure of the company is as follows: Debt 7,000 outstanding bonds, at 7.5% coupon and 20 years to maturity. These bonds pay interest semiannually and quoted a price of 108 percent of par. Common Stock -180,000 shares outstanding, selling for $50 per share: Beta .90. Preferred Stock 8,000 shares of 5.5 percent preferred stock outstanding, currently selling for $95.00 per share.

Answer this question:

a. Use the Net Present Value to document a comparison of the different costs of projects that will lead to a green solution for a local powerplant .