Question

17.A 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 nearby river. The firm could spend an additional $10.66 million at Year 0 to mitigate the environmental Problem, but it would not be required to do so. Developing the mine (without mitigation) would cost $66 million, and the expected cash inflows would be $22 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $23 million. The risk-adjusted WACC is 11%.

a.Calculate the NPV and IRR with mitigation. Round your answers to two decimal places. Do not round your intermediate calculations. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55.

NPV $  million
IRR

b.Calculate the NPV and IRR without mitigation. Round your answers to two decimal places. Do not round your intermediate calculations. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55.

NPV $  million
IRR

Answer 1

a.

NPV with mitigation is $ 8.35 Million

IRR is 15.24 %

b.

NPV without mitigation is $ 15.31 Million

IRR is 19.86 %

Explanation:

Computation of NPV for both Projects:

			Project with mitigation		Project without mitigation
Year	Computation of PV Factor	PV Factor @ 11 % (F)	Cash Flow Cm	PV (= F x Cm)	Cash Flow, C	PV (= F x C)
0	1/(1+0.11)^0	1	($76,660,000)	($76,660,000)	($66,000,000)	($66,000,000)
1	1/(1+0.11)^1	0.90090090090	$23,000,000	$20,720,721	$22,000,000	$19,819,820
2	1/(1+0.11)^2	0.81162243324	$23,000,000	$18,667,316	$22,000,000	$17,855,694
3	1/(1+0.11)^3	0.73119138130	$23,000,000	$16,817,402	$22,000,000	$16,086,210
4	1/(1+0.11)^4	0.65873097415	$23,000,000	$15,150,812	$22,000,000	$14,492,081
5	1/(1+0.11)^5	0.59345132806	$23,000,000	$13,649,381	$22,000,000	$13,055,929
			NPV	$8,345,631	NPV	$15,309,734

Computation of IRR for both Projects:

	A	B	B
1	Year	Cash Flow (with mitigation)	Cash Flow, C (without mitigation)
2	0	($76,660,000)	($66,000,000)
3	1	$23,000,000	$22,000,000
4	2	$23,000,000	$22,000,000
5	3	$23,000,000	$22,000,000
6	4	$23,000,000	$22,000,000
7	5	$23,000,000	$22,000,000
8	IRR	15.24%	19.86%

Let the excel sheet be looks like as the above table.

To compute IRR for the project with mitigation insert formula in B8 as “=IRR(B2:B7), which will display as 15.24 %

To compute IRR for the project without mitigation insert formula in C8 as “=IRR(C2:C7), which will display as 19.86 %