Week 8 Capital Budgeting Assignment – worth 200 points 1. NPV Project L costs $65,000, its expected cash inflows are $12,000 per year for 9 years, and its WACC is 9%. What is the project’s NPV? (worth...

In this assignment, you will calculate the NPV, IRR and Payback period for capital budgeting projects. You will also have the opportunity to report on and evaluate an actual capital project of your choosing.


Week 8 Capital Budgeting Assignment – worth 200 points 1. NPV Project L costs $65,000, its expected cash inflows are $12,000 per year for 9 years, and its WACC is 9%. What is the project’s NPV? (worth 10 points) 2. IRR Refer to #1. What is the project’s IRR? (worth 10 points) 3. Payback Period Refer to #1. What is the project’s payback? (worth 10 points) Capital Budgeting Criteria: Ethical Considerations Problem 1 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 mitigation) would cost $60 million, and the expected cash inflows would be $20 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $21 million. The interest rate is 12%. a. Calculate the NPV and IRR with and without mitigation. (worth 40 points) b. How should the environmental effects be dealt with when this project is evaluated? (worth 10 points) c. Should this project be undertaken? If so, should the firm do the mitigation? (worth 10 points) Capital Budgeting Criteria: Ethical Considerations Problem 2 An electric utility is considering a new power plant in northern Arizona. Power from the plan would be sold in the Phoenix area, where it is badly needed. Because the firm has received a permit, the plan 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 no be required to do so. The plan without mitigation would cost $240 million, and the expected cash inflows would be $80 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $84 million. Unemployment in the area where the plant would be built is high, and the plan would provide about 350 good jobs. The interest rate is 17%. a. Calculate the NPV and IRR with and without mitigation. (worth 40 points) b. How should the environmental effects be dealt with when evaluating this project? (worth 10 points) c. Should this project be undertaken? If so, should the firm do the mitigation? Why or why not? (worth 10 points) Now that you have crunched the numbers, let’s do some exploring: Capital Project Research (worth 50 points) · Choose a company that has funded a capital project. To find a project, you can think of a company you are interested in and search online. For example: Let’s say you are interested in Apple. You can Google “Apple corporation capital projects”. Here’s an example link to a project: Apple Capital Project · Describe the project · What are the details of the project? · In which category (from our Week 8 lecture) does the project fit (if you can determine)? · How much will the project cost? · How is the project funded? Was it raised through investors (stocks & bonds) or debt financing? · Are there any ethical considerations related to this project? · Format Guidelines · Please write this portion in paragraph form. · Double-space your paragraphs and check for spelling/grammar. · Include proper citations for your research sources (remember to use Turabian style) 2