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Capital Budgeting Criteria

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A mining company is considering a new project. It has received a permit, so the mine would be legal, but it would cause significant harm to a nearby river, The firm could spend an additional $10 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 $60 million, and the expected net cash inflows would be $20 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $21 million. The risk adjusted WACC is 12 percent.

a) Calculate the NPV and IRR with and without mitigation.
b) How should the environmental effects be dealt with when evaluating the project?
c) Should this project be undertaken? If so, should the firm do the mitigation?

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Capital budgeting criteria
A mining company is considering a new project. It has received a permit, so the mine would be legal, but it would cause significant harm to a nearby river. The firm could ...

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This solution is comprised of a detailed explanation to calculate the NPV and IRR with and without mitigation, how should the environmental effects be dealt with when evaluating the project, and should this project be undertaken.

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Capital Budgeting Criteria: Example Problem

A firm with a 14% WACC is evaluating two projects for this year's capital budget. After- tax cash flows, including depreciation, are as follows:

0 1 2 3 4 5
Project A -6,000 2,000 2,000 2,000 2,000 2,000
Project B -18,000 5,600 5,600 5,600 5,600 5,600

a. Calculate NPV, IRR, MIRR, payback, and discounted payback for each project.
b. Assuming the projects are independent, which one(s) would you recommend?
c. If the projects are mutually exclusive, which would you recommend?
d. Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR?

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