A mining company is considering a new project. Because the mine has received a permit, the project 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 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%. 1. Calculate the NPV with and without mitigation. 2. How should the environmental effects be dealt with when this project is evaluated? 3. Should this project be undertaken? If so, should the firm do the mitigation?

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Chapter1: Making Economics Decisions
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A mining company is considering a new project.
Because the mine has received a permit, the project
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 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%.
1. Calculate the NPV with and without mitigation.
2. How should the environmental effects be dealt
with when this project is evaluated?
3. Should this project be undertaken? If so, should
the firm do the mitigation?
Transcribed Image Text:A mining company is considering a new project. Because the mine has received a permit, the project 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 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%. 1. Calculate the NPV with and without mitigation. 2. How should the environmental effects be dealt with when this project is evaluated? 3. Should this project be undertaken? If so, should the firm do the mitigation?
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