ICAEW BIP · Chapter 13 · Question 8 of 9
A company is appraising a new plant costing £300,000. Annual net cash inflows before environmental costs will be £120,000 for 4 years. The plant will incur a carbon emissions levy of £15,000 a year, and site restoration costing £60,000 will be paid at the end of year 4. The cost of capital is 10%. The 4-year annuity factor at 10% is 3.170 and the year 4 discount factor is 0.683. What is the net present value of the project after taking these sustainability-related costs into account?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) -£8,130
Explanation
Net annual inflows = £120,000 - £15,000 = £105,000. PV = £105,000 x 3.170 = £332,850. PV of site restoration = £60,000 x 0.683 = £40,980. NPV = £332,850 - £40,980 - £300,000 = -£8,130. Ignoring the environmental costs gives a misleading NPV of £80,400; including carbon and restoration costs in the cash flows is one way of incorporating sustainability into investment appraisal, alongside non-financial factors.
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