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 net cash inflows would be $20 million per year for 5 years. If the firm does invest in mitigation, the annual cash inflows would be $21 million. The firm's cost of capital is 12%.
a. Determine the NPV and IRR with and without mitigation.
b. How should the environmental effects be dealt with when this project is evaluated?
c. Should this project be undertaken? If so, should the firm do the mitigation?