CAPITAL BUDGETING CRITERIA: ETHICALCONSIDERATIONS

An electric utility is considering a new power plant in northernArizona. Power from the plant would be sold in the Phoenix area,where it is badly needed. Because the firm 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 tomitigate the environmental problem, but it would not be required todo so. The plant without mitigation would cost $210.55 million, andthe expected cash inflows would be $70 million per year for 5years. If the firm does invest in mitigation, the annual inflowswould be $75.35 million. Unemployment in the area where the plantwould be built is high, and the plant would provide about 350 goodjobs. The risk adjusted WACC is 17%.

1. Calculate the NPV and IRR with mitigation. Round your answers totwo decimal places. Enter your answer for NPV in millions. Do notround your intermediate calculations. For example, an answer of$10,550,000 should be entered as 10.55. Negative value should beindicated by a minus sign.
   NPV $   million
   IRR %

   Calculate the NPV and IRR without mitigation. Round your answersto two decimal places. Enter your answer for NPV in millions. Donot round your intermediate calculations. For example, an answer of$10,550,000 should be entered as 10.55.
   NPV $   million
   IRR %

2. How should the environmental effects be dealt with whenevaluating this project?
   1. The environmental effects should be treated as a remotepossibility and should only be considered at the time in which theyactually occur.
   2. The environmental effects if not mitigated would result inadditional cash flows. Therefore, since the plant is legal withoutmitigation, there are no benefits to performing a "no mitigation"analysis.
   3. The environmental effects should be ignored since the plant islegal without mitigation.
   4. The environmental effects should be treated as a sunk cost andtherefore ignored.
   5. If the utility mitigates for the environmental effects, theproject is not acceptable. However, before the company chooses todo the project without mitigation, it needs to make sure that anycosts of "ill will" for not mitigating for the environmentaleffects have been considered in the original analysis.
   
   -Select-IIIIIIIVV
3. Should this project be undertaken?
   1. The project should be undertaken only if they do not mitigatefor the environmental effects. However, they want to make sure thatthey've done the analysis properly due to any "ill will" andadditional "costs" that might result from undertaking the projectwithout concern for the environmental impacts.
   2. The project should be undertaken only under the "mitigation"assumption.
   3. The project should be undertaken since the IRR is positiveunder both the "mitigation" and "no mitigation" assumptions.
   4. The project should be undertaken since the NPV is positiveunder both the "mitigation" and "no mitigation" assumptions.
   5. Even when no mitigation is considered the project has anegative NPV, so it should not be undertaken.
   
   -Select-IIIIIIIVV