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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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    Solution Preview

    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 ...

    Solution Summary

    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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