Example of the problem:
I have 11 capital projects that are all being analyzed except one. Why should this project not be evaluated? What is the calculated NPV (discounted at the WACC) and the IRR of this project? Should the project be undertaken? Why?
The estimated WACC as of January was 10.6%
Projected cost $6M.
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 invloves 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 $6M; and the speculated cost for the same equipment would cost $15M 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.
This project is in the environment category. To calculate the NPV or the IRR, we need to know the initial capital outlay and the cash flows during the life of the project. In this case the initial capital outlay is known but we do not have the cash flows of the project. The ...
The solution explains how project evaluation for environmental projects be undertaken