Reference no: EM132537832

Your company asks you to help them reduce air pollution in their power plant. You're presented with three options.

(1.) Provide the local government a one-time tax of $13,000,000 for the pollution.

(2.) Shut down the power plant and install a power cable that runs from one of the other nearby islands that has a powerplant. This would cost our company $1,000,000 at the end of the year, $3,000,000 at the end of next year, and $1,000,000 yearly thereafter for maintenance.

(3.) The powerplant can be retrofitted with technology that reduces pollution emissions and makes the powerplant green. The cost of this project would be $750,000,000 at the end of this year, and $100,000 for the next 50 years for maintenance.

This current market conditions for your company are as follows.

Weighed Average Cost of Capital (WACC)= 10.38%

Semi-annual YTM of bonds= 6.76%

After-tax cost of debt= 4.40%

Cost of Common Stock= 15.80%

Total Market Value= $17,320,000

Cost of Preferred Stock= 5.79%

We already know the Net Present Value of Option 1 in $13,00,000.

Using cashflows, what is the NPV of Options 2 and 3?