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 $269.99 millon, and the expected cash inflows would be $90 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $93.53 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% 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 S IRR million million b. How should the environmental effects be dealt with when evaluating this project? I. The environmental effects should be ignored since the plant is legal without mitigation II. The environmental effects should be treated as a sunk cost and therefore ignored III. 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 "ill will" for not mitigating for the environmental effects have been considered in the original analysis. IV. The environmental effects should be treated as a remote possibility and should only be considered at the time in which they actually occur V. The environmental effects if not mitigated would result in additional cash flows. Therefore, since the plant is legal without mitigation, there are no benefits to performing a "no mitigation" analysis Select- c. Should this project be undertaken? I. The project should be undertaken only under the "mitigation" assumption. II. The project should be undertaken since the IRR is positive under both the "mitigation" and "no mitigation" assumptions III. The project should be undertaken since the NPV is positive under both the "mitigation" and "no mitigation" assumptions. IV. Even when no mitigation is considered the project has a negative NPV, so it should not be undertaken V. The project should be undertaken only if they do not mitigate for the environmental effects. However, they want to make sure that they've done the analysis properly due to any "ill will" and additional "costs" that might result from undertaking the project without concern for the environmental impacts. -Select-

Answer 1

Insert Page Layout Formulas Data Review View Help Tell me what you want to do Cut AutoSum A 11AA General Paste Copy Conditional Format as Cell Formatting Table Styles 트트 圍Merge & Center Insert Delete Format Sort & Find & Filter Select B 1 u. |H1· 6-욜. | $. % , 58 류 . ClearF Fonmat Painter Number Editing Clipboard A1 Calculating NPV and IRR WITH mitigation Calculating NPV and IRR WITHOUT mitigation Year cash flows PV factor at 18% Net present value Year cash flows PV factor at 18% Net present value 309,990,000 93,530,000 93,530,000 93,530,000 93,530,000 93,530,000 269,990,000 90,000,000 90,000,000 90,000,000 90,000,000 90,000,000 0.8475 0.7182 0.6086 0.5158 0.4371 79266675 67173246 56922358 48242774 40881963 0.8475 0.7182 0.6086 0.5158 0.4371 76275000 64638000 54774000 39339000 10 Net present value 17,502,984 Net present value 11,458,000 12 13 15% IRR IRR 15 17 18 f the firm would invest additional amount in mitigation, then I will get negative Net Present Value and it will not be beneficial to power plant. 19 And here, we can see that we are getting positive NPV without mitigation, thus, we should go for plant without mitigation. 20 21 Sheet1 Ready 100%

Page Layout FormulasData Review View Tell me what you want to do Help Insert A Cut Calibri General .1 u .田. ?». Δ. Paste Insert D 류극 트트圍Merge & Center. $, % ,留器 Conditional Format as Cell Format Painter Formatting Table Styles Styles Font Clipboard Alignment Number Calculating NPV and IRR WITH mitigation PV factor at 18% cash flows Net present value Year -C4 D4 C5*D5 -C6 D6 0 1 2 1 0.8475 0.7182 0.6086 0.5158 0.4371 93530000 93530000 93530000 93530000 93530000 -C8 D8 -C9*D9 10 -SUM(E4:E9) Net present value 12 13 -IRR(C4:C9) IRR 15

Insert Page Layout FormulasData Review View Help Tell me what you want to do Σ AutoSum .|11.AA.| 9-2므 Wrap Text ニー Calibri General Ea Copy 韋Merge & Center. | $. % , 冒昮| conditional Format as Cell ormatting Table Styles Paste Insert Delete Format B 1 u·ー· Cr. ▲ . | Format Painter Clear Clipboard Font Alignment Number Cells Calculating NPV and IRR WITHOUT mitigation cash flows PV factor at 1896 Net present value Year -K4 L4 0 0.8475 0.7182 0.6086 0.5158 0.4371 2 5 10 SUM(M4:M9) Net present value 12 -IRR(K4:K9) 13 IRR 15 16