An electric utility company is considering construction of a newpower facility in Albuquerque, New Mexico. Construction of theplant would cost $275 millioneach year for fiveyears. Expected annual net cash flows are $85 million eachyear for five years.

Power from the facility would be sold in the Albuquerque andSanta Fe areas, where it is badly needed. The firm has received apermit, so the plant would be legal as currently proposed, but airpollution would be an issue with the new facility.

To alleviate the environmental concerns the company could spendan additional $50 millionwhen the plant is built.The additional funds cover the costs of special equipment designedto minimize the air pollution. At this time, the specialpollution-abatement equipment is not required by law. If the firmadds the environmental protections to the facility, the expectedannual net cash flows are $90 million for fiveyears.

Unemployment rates are high in the area Where the plant would bebuilt. The plant would provide about 500 new, well-paying jobs.

The risk-adjusted WACC for this project is 15%. As an employeeof the utility company, you have been tasked with analyzing theproject. You are to make your recommendations to the company’sBoard of Directors in a memo.

1. Calculate the NPV, IRR and regular Payback period for thisproject (with and without the environmental protectionequipment).
2. What is your recommendation for the utility company? Providesupport for your responses.
3. What additional qualitative/quantitative factors should beconsidered in accepting or rejecting both versions of this project?The factors might include job creation, salvage value, projectlife, discount rate (WACC) etc.