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Capital budgeting criteria: ethical considerations 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 $269.87 million, and the expected cash inflows would be $90 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $94.24 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 16%. a. 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 % b. How should the environmental effects be dealt with when evaluating this project? I.The environmental effects should be treated as a sunk cost and therefore ignored. II.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 needs to make sure that any costs of "ill will" for not mitigating for the environmental effects have been considered in that analysis. III.The environmental effects should be treated as a remote possibility and should only be considered at the time in which they actually occur. IV.The environmental effects if not mitigated would result in additional cash flows. Therefore, since the plant is legal without mitigation, there are no benefits to performing a "no mitigation" analysis. V.The environmental effects should be ignored since the plant is legal without mitigation. -Select-IIIIIIIVV c. Should this project be undertaken? I.The project should be undertaken since the NPV is positive under both the "mitigation" and "no mitigation" assumptions. II.Even when no mitigation is considered the project has a negative NPV, so it should not be undertaken. III.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 properly due to any "ill will" that might result from undertaking the project without concern for the environmental impacts. IV.The project should be undertaken only under the "mitigation" assumption. V.The project should be undertaken since the IRR is positive under both the "mitigation" and "no mitigation" assumptions.
Josh Smith has compiled some of his personal financial data in order to determine his liquidity position. Calculate Josh’s liquidity ratio. Several of Josh’s friends have told him that they have liquidity ratios of about 1.8. How would you analyze Jo..
Your firm has an average collection period of 39 days. Current practice is to factor all receivables immediately at a 2.00 percent discount. What is the effective cost of borrowing in this case?
You own a bond with a 6.3 percent coupon rate and a yield to call of 7.2 percent. The bond currently sells for $1,105. If the bond is callable in five years, what is the call premium of the bond?
Examine strategies for decision-making based on quantitative models and examine the criticality of timely information.
Community Hospital has annual net patient revenues of $150 million. At the present time, payments received by the hospital are not deposited for six days on average. The hospital is exploring a lock-box arrangement will promises to cut the six days t..
Consider the following capital market: a risk-free asset yielding 0.75% per year and a mutual fund consisting of 70% stocks and 30% bonds. The expected return on stocks is 10.75% per year and the expected return on bonds is 3.25% per year.
A couple has just given birth to a baby and named him Jimmy. They want to start a college savings account for Jimmy and start saving for his college education. The following facts will help you work this problem
Suppose the market for lending is risk-free and perfectly efficient. Use an arbitrage argument to show there can only be one market interest rate. What are the two components of total return for a bond? How do bond dealers make money?
Why a bank lending office would be interested in the cash flow statement of a company that is applying for a loan?
Why is the quantity factor for tray costing >1.0 for >20 trays? Trays are expensive no matter how many you buy. Custom trays cost more when you only order a few of them
Banks use depository transfer checks to move surplus funds from bank accounts to its concentration bank account or accounts. Explain how this is done.
Which of the following would most likely increase the accounting return to shareholders?
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