Capital budgeting for environmental projects offers an interesting area for additional study. The Environmental Protection Agency (EPA) has partnered with Tellus Institute (www. tellus.org) to further its ongoing interest in environmental cost management. Much of the the information relating to the U.S. EPA environmental accounting project can be found in the archives at the EPA website (www.epa.gov). The EPA environmental accounting project dealt with such topics as environmental cost definitions, decisions using environmental costs, and capital budgeting. Using the EPA and Tellus websites as well as the World Resources Institute (www.wri.org) and other resources that you can locate, answer the following questions.

Required:

1. What evidence exists that firms use the payback period for screening and evaluating environmental projects? If payback is used, can you find the most common hurdle rate that firms use to justify environmental projects?

2. Are NPV and IRR used for environmental project approval? Can you find out what the hurdle rate is for IRR? Do you think this hurdle rate is the cost of capital? If not, then discuss why a different required rate is used.

3. Do you think the approval thresholds for environmental projects tend to be higher, lower, or the same when compared to nonenvironmental projects? See if you can find any evidence to support your viewpoint. Why might the approval thresholds differ from those of nonenvironmental projects?

4. See if you can find a discussion on how capital budgeting for environmental projects may differ from that for conventional projects. List these differences.