Skip to content

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

Zeta plc evaluates a mine extension with a base NPV of $12.0m at its normal cost of capital. Management estimates that including the likely cost of future environmental remediation, which was omitted from the base case, will cost $9.0m in cash at the end of year 5. Zeta's cost of capital is 10%. Ignoring tax, what is the NPV after including the remediation cost? (Discount factor for year 5 at 10% = 0.621.)

The adjusted NPV is $6.41m. The $9.0m remediation outflow in year 5 is discounted at 10% using a factor of 0.621, giving a present value of $5.589m, which is deducted from the base NPV of $12.0m. Deducting the undiscounted amount would wrongly give $3.00m.

  1. A$3.00m
  2. B$6.41mCorrect
  3. C$21.00m
  4. D$17.59m

Explanation

PV of remediation = 9.0 x 0.621 = $5.589m. Adjusted NPV = 12.0 - 5.589 = $6.411m, i.e. $6.41m. Subtracting the undiscounted $9.0m gives $3.00m, which ignores the time value of money.

Did you get it right without looking?

One question tells you little. A timed set on Corporate environmental, social, governance (ESG) and ethical issues shows your real accuracy, how long you take and where you lose marks.

Practise Corporate environmental, social, governance (ESG) and ethical issuesFree diagnostic mock

More Corporate environmental, social, governance (ESG) and ethical issues questions