Refer to Picture, Please answer Part A and B An electric utility is considering a new power plant in northern Arizona. Power from the plant would be sold in the Phoenix area, where it is badly needed. Because the firmhas received a permit, the plant would be legal; but it would cause some air pollution. The company could spend an additional $40 million at Year 0 to mitigate theenvironmental problem, but it would not be required to do so. The plant without mitigation would cost $239.67 million, and the expected cash inflows would be $80 millionper year for 5 years. If the firm does invest in mitigation, the annual inflows would be $84.62 million. Unemployment in the area where the plant would be built is high, andthe plant would provide about 350 good jobs. The risk adjusted WACC is 16%.a. Calculate the NPV and IRR with mitigation. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, ifany, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to two decimal places.NPV: $millionIRR:%Calculate the NPV and IRR without mitigation. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negativevalues, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to two decimal places.NPV: $millionIRR:%b. How should the environmental effects be dealt with when evaluating this project?I. The environmental effects should be ignored since the plant is legal without mitigation.II. The environmental effects should be treated as a sunk cost and therefore ignored.III. If the utility mitigates for the environmental effects, the project is not acceptable. However, before the company chooses to do the project without mitigation, it needsto make sure that any costs of "ill will" for not mitigating for the environmental effects have been considered in the original analysis.IV. The environmental effects should be treated as a remote possibility and should only be considered at the time in which they actually occur.V. The environmental effects if not mitigated would result in additional cash flows. Therefore, since the plant is legal without mitigation, there are no benefits toperforming a "no mitigation" analysis.-Select-c. Should this project be undertaken?I. The project should be undertaken only under the "mitigation" assumption.II. The project should be undertaken since the IRR is positive under both the "mitigation" and "no mitigation" assumptions.III. The project should be undertaken since the NPV is positive under both the "mitigation" and "no mitigation" assumptions.IV. Even when no mitigation is considered the project has a negative NPV, so it should not be undertaken.V. The project should be undertaken only if they do not mitigate for the environmental effects. However, they want to make sure that they've done the analysis properlydue to any "ill will" and additional "costs" that might result from undertaking the project without concern for the environmental impacts.-Select-

The capital budgeting is a tool or technique that helps to analyze the profitability of the project.

utility from the plant would badly has received a permit, the plant would be legal; but it would cause some air pollution. The company could spend an additional $40 million at Year 0 to mitigate the environmental problem, but it would not be required to do so. The plant without mitigation would cost $239.67 million, and the expected cash inflows would be $80 million ber year for 5 years. If the firm does invest in mitigation, the annual inflows would be $84.62 million. Unemployment in the area where the plant would be built is high, and he plant would provide about 350 good jobs. The risk adjusted WACC is 16%. a. Calculate the NPV and IRR with mitigation. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to two decimal places. NPV: $ million IRR: Calculate the NPV and IRR without mitigation. Enter your answer for NPV in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to two decimal places. NPV: $ million IRR: %

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS