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Capital Budgeting for Environmental Projects

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I have 11 capital projects that are all being analyzed except one. I am attempting to explain why this project was not evaluated. I then need to calculate the NPV (discounted at the WACC) and the IRR of the project. Then I need to decide if the project should be undertaken and why or why not.

The estimated WACC as of January was 10.6%

This is what I have on the project:

Effluent-water treatment at four plants: The food company preprocessed a variety of fresh fruits at two of its plants. One of the first stages of processing involves cleaning the fruit to remove pesticides and dirt. The dirty water was simply sent down the drain and into a river. Recent community directives called for any waste containing even slight traces of poisonous chemicals to be treated at the sources, and gave companies four years to comply. As an environmentally oriented project, this proposal fell outside the normal financial tests of project attractiveness. However the water treatment equipment could be purchased today for 6 mil; and the speculated cost for the same equipment would cost 15 mil in four years when immediate conversion became mandatory. In the intervening time, the company would run the risks that the community regulators would shorten the compliance time or that the company's pollution record would become public and impair the image of the company in the eyes of the consumer. This project would be classed in the environmental category.

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Solution Summary

The solution explains how environmental projects be evaluated and the use of NPV and IRR techniques

Solution Preview

This project was not evaluated because it is in the environment category. This category includes projects which need to be taken up to protect the environment and do not have the standard cost benefit analysis, since the benefits go the society at large and cannot be quantified. ...

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