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ACCA Strategic Professional · Strategic Business Leader · Financial analysis and decision-making techniques

Corvane Energy, a utility, must choose between a coal-fired capacity extension and a wind portfolio. The coal option has an NPV of $14m and the wind option $9m. Scenario analysis shows that a plausible carbon-pricing regime would turn the coal NPV to -$6m, while wind stays near $8m. Institutional investors have signalled they may divest from fossil fuel projects. Which conclusion best integrates these points into the decision?

Coal's higher base-case NPV is exposed to carbon-pricing and investor-divestment risks that scenario analysis shows could make it negative, while wind is stable. The board should weigh these risks against its risk appetite, so wind may be preferable. Neither NPV nor qualitative factors should be applied mechanically.

  1. AChoose coal, since the base-case NPV is higher and scenarios are speculative
  2. BChoose wind, since non-financial factors must always override NPV
  3. CThe coal NPV is exposed to regulatory and stakeholder risks not captured in the base case, so the wind option may be preferable once these are weighed, with the board explicitly judging its risk appetiteCorrect
  4. DReject both options because neither has an NPV above $15m

Explanation

The base-case NPV omits regulatory risk and investor sentiment, both of which can alter cash flows and cost of capital. Scenario analysis shows coal's value is fragile while wind is stable. The decision should be a reasoned judgement about risk appetite, not a mechanical rule either favouring NPV or non-financial factors absolutely.

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