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

Kora Ltd is considering a project with a present value of operating cash flows of $4,000,000 against an investment of $3,700,000. A pressure group claims the project will impose social costs on a community. Kora estimates a one-off, certain remediation spend of $400,000 (present value) that it can voluntarily commit to, which would avoid any later fines and protect its licence to operate. Which statement is correct if Kora commits to the remediation and treats it as a project cost?

Net present value is minus $100,000, found by taking the base NPV of $300,000 and deducting the $400,000 remediation cost. On a purely financial basis the project would be rejected, although non-financial benefits could be weighed by management.

  1. ANPV is $300,000 and the project is accepted
  2. BNPV is -$100,000 and the project is rejected on a pure financial basisCorrect
  3. CNPV is $700,000 because remediation is a transfer
  4. DNPV is $100,000 and the project is accepted

Explanation

Base NPV = 4,000,000 − 3,700,000 = 300,000. Deducting remediation of 400,000 gives −100,000. On a pure financial basis the project is rejected, although management may weigh strategic benefits such as licence to operate. The $300,000 option ignores the remediation cost.

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