You own a coal mining company and are considering opening a new mine. The mine will cost $115.4 million to open. If this money is spent immediately, the mine will generate $20.2 million for the next 10 years. After that, the coal will run out and the site must be cleaned and maintained at environmental standards. The cleaning and maintenance are expected to cost $1.6 million per year in perpetuity. What does the IRR rule say about whether you should accept this opportunity? If the cost of capital is 7.9%, what does the NPV rule say? Use the graph below to determine the IRR(s) in the problem. NPV of the Investment in the Coal Mine 16- 15 -14- Discount Rate (%) What does the IIRR rule say about whether you should accept this opportunity? (Select the best choice below.) O A. The IRR is r= 10.62%, so accept the opportunity. O B. There are two IRRS, so you cannot use the IRR as a criterion for accepting the opportunity. OC. Accept the opportunity because the IRR is greater than the cost of capital. O D. Reject the opportunity because the IRR is lower than the 7.9% cost of capital. NPV ($ millions)

You own a coal mining company and are considering opening a new mine. The mine will cost $115.4 million to open. If this money is spent immediately, the mine will generate $20.2 million for the next 10 years. After that, the coal will run out and the site must be cleaned and maintained at environmental standards. The cleaning and maintenance are expected to cost $1.6 million per year in perpetuity. What does the IRR rule say about whether you should accept this opportunity? If the cost of capital is 7.9%, what does the NPV rule say? Use the graph below to determine the IRR(s) in the problem. NPV of the Investment in the Coal Mine 16- 15 -14- Discount Rate (%) What does the IIRR rule say about whether you should accept this opportunity? (Select the best choice below.) O A. The IRR is r= 10.62%, so accept the opportunity. O B. There are two IRRS, so you cannot use the IRR as a criterion for accepting the opportunity. OC. Accept the opportunity because the IRR is greater than the cost of capital. O D. Reject the opportunity because the IRR is lower than the 7.9% cost of capital. NPV ($ millions)

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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