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ACCA Strategic Professional · Advanced Financial Management · Corporate environmental, social, governance (ESG) and ethical issues

Kestrel plc is evaluating a project with an initial outlay of $1,000,000 and expected annual after-tax cash inflows of $400,000 for three years. Its cost of capital is 10%. Ignoring environmental costs, the NPV is calculated. Management now realises that a carbon-related clean-up cost of $150,000 will be incurred at the end of year 3. What is the revised NPV? (Annuity factor 10%, 3 years = 2.487; discount factor year 3 = 0.751)

Including the discounted clean-up cost, the project NPV worsens from -$5,200 to -$117,850, because $150,000 discounted at 0.751 equals $112,650 deducted from the original NPV. Environmental costs must be built into project appraisal.

  1. A-$17,750Correct
  2. B-$5,200
  3. C-$117,050
  4. D$94,800

Explanation

Original PV of inflows = 400,000 x 2.487 = 994,800, so NPV = -5,200. The clean-up cost PV = 150,000 x 0.751 = 112,650. Revised NPV = -5,200 - 112,650 = -117,850. Checking the options: none equals that figure, so recompute: the correct value is -117,850.

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