An electric utility is considering a new power plant in northern Arizona. Power from the plant would be sold in the Phoe
Posted: Sat Feb 26, 2022 9:09 am
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 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 to
mitigate the environmental Problem, but it would not be required to
do so. The plant without mitigation would cost $209.71 million, and
the expected cash inflows would be $70 million per year for 5
years. If the firm does invest in mitigation, the annual inflows
would be $75.84 million. Unemployment in the area where the plant
would be built is high, and the plant would provide about 350 good
jobs. The risk adjusted WACC is 17%.
Calculate the NPV and IRR with mitigation. Round your answers to
two decimal places. Enter your answer for NPV in millions. For
example, an answer of $10,550,000 should be entered as 10.55.
NPV $ million
IRR %
Calculate the NPV and IRR without mitigation. Round your answers
to two decimal places. Enter your answer for NPV in millions. For
example, an answer of $10,550,000 should be entered as 10.55.
NPV $ million
IRR %
a. Should this project
be undertaken? Why or why not?
b. If so, should
the firm do the mitigation? Why or why not?
Arizona. 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 to
mitigate the environmental Problem, but it would not be required to
do so. The plant without mitigation would cost $209.71 million, and
the expected cash inflows would be $70 million per year for 5
years. If the firm does invest in mitigation, the annual inflows
would be $75.84 million. Unemployment in the area where the plant
would be built is high, and the plant would provide about 350 good
jobs. The risk adjusted WACC is 17%.
Calculate the NPV and IRR with mitigation. Round your answers to
two decimal places. Enter your answer for NPV in millions. For
example, an answer of $10,550,000 should be entered as 10.55.
NPV $ million
IRR %
Calculate the NPV and IRR without mitigation. Round your answers
to two decimal places. Enter your answer for NPV in millions. For
example, an answer of $10,550,000 should be entered as 10.55.
NPV $ million
IRR %
a. Should this project
be undertaken? Why or why not?
b. If so, should
the firm do the mitigation? Why or why not?