Question

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 $210.64 million, and the expected cash inflows would be $70 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be 75.27 million. Unemployment in the area where the plant would be built is h and the plant would provide about 3 The risk adi sted WAC Ob is 18% o a. Calculate the NPV and IRR with mitigation. Round your answers to two decimal places. Enter your answer for NPV in millions. Do not round your intermediate calculations. For example, an answer of $10,550,000 should be entered as 10.55. Negative value should be indicated by a minus sign. NPV $ IRR Calculate the NPV and IRR without mitigation. Round your answers to two decimal places. Enter your answer for NPV in millions. Do not round your intermediate calculations. For example, an answer of $10,550,000 should be entered as 10.55 NPV$ IRR 3 million * million

Answer 1

1 With Mitigation Year 0 Without Mitigation cash flows $250.64 $75.27 $75.27 $75.27 $75.27 $75.27 15.28% IRR(B3:B8) pv @ 18% Present value $250.64 $63.79 $54.06 $45.81 $38.82 $32.90 -$15.26 cash flows -$210.64 $70.00 $70.00 $70.00 $70.00 pv @ 18% Present value 210.64 $59.32 $50.27 $42.60 $36.11 $30.60 $8.26 Year 0.847 0.718 0.609 0.516 0.437 NPV 0.847 0.718 0.609 0.516 0.437 2 2 IRR 9 IRR 10 19.72% NPV IRR(G3:G8) $15.26 Million S8.26 Million NPV NPV 12 13