A mining company is considering a new project. Because the mine has received a permit, the...

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A mining company is considering a new project. Because the minehas received a permit, the project would be legal; but it wouldcause significant harm to a nearby river. The company could spendan additional R10 million at Year 0 to mitigate the environmentalproblem, however it would not be required to do so. Developing themine (without mitigation) would cost R60 million, and the expectedcash inflows would be R20 million per year for 5 years. If thecompany does invest in mitigation, the annual inflows would be R21million. The risk-adjusted WACC is 12%.
Required:
2.1 Calculate the NPV and IRR without mitigation. (5)
2.2 How should the environmental effects be dealt with whenevaluating this project? (5)
2.3 Should this project be undertaken? If so, should the company domitigation? Why or why not? (5)

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Answer 21 Without mitigation Development cost R60 million R60000000 Annual cash flow R20 million R20000000 Project life 5 years WACC 12 NPV Annual cash flow PV of 1 annuity for 5 year at 12 rate Development cost 20000000 1 1 1 12 5 12 60000000 R1209552405 To calculate IRR we will use See Answer

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A mining company is considering a new project. Because the minehas received a permit, the project would be legal; but it wouldcause significant harm to a nearby river. The company could spendan additional R10 million at Year 0 to mitigate the environmentalproblem, however it would not be required to do so. Developing themine (without mitigation) would cost R60 million, and the expectedcash inflows would be R20 million per year for 5 years. If thecompany does invest in mitigation, the annual inflows would be R21million. The risk-adjusted WACC is 12%.Required:2.1 Calculate the NPV and IRR without mitigation. (5)2.2 How should the environmental effects be dealt with whenevaluating this project? (5)2.3 Should this project be undertaken? If so, should the company domitigation? Why or why not? (5)