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Capital budgeting criteria-ethical considerations

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CAPITAL BUDGETING CRITERIA: ETHICAL CONSIDERATIONS:

A mining company is considering a new project. Because the mine has received a permit, the project would be legal, but it would cause significant harm to a nearby river. The firm could spend an additional $10 million at Year 0 to mitigate the environmental problem, but it would not be required to do so. Developing the mine (without litigation) would cost $60 million, and the expected cash inflows would be $20 million per year for five years. If the firm does invest in mitigation, the annual inflows would be $21 million. The risk-adjusted WACC is 12%.

-Calculate the NPV and IRR with and without mitigation.

-How should the environmental effects be dealt with when this project is evaluated?

-Should this project be undertaken? If so, should the firm do the mitigation? Why or why not?

Reference no: EM133061534

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