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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 $210.17 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 $75.23 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 18%.
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.
A certain stock has a beta of 1.5. If the risk-free rate of return is 5.1 percent and the market risk premium is 8.6 percent, what is the expected return of the stock? What is the expected return of a stock with a beta of 1.27?
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Which one of these combines scenario analysis with sensitivity analysis?
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Assume that the 3-month futures contract on SPX settled at 2070, r = 0.25%, q = 2.25%, arbitrage transactions costs (TC) involving these futures contract are 1.16 (index points). The TC band is [2060.84, 2058.52]. Therefore, the index (SPX) must have..
What proportion of a firm is debt financed if the WACC is 12%, the return on debt is 6%, the tax rate is 40% and the required return on equity is 18%?
The constant dividend growth model is:
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