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 capita is 7.9%, what does the NPV rule say? ..... 16- 10 15 20 Discount Rate (%) What does the IRR 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. B. There are two IRRS, so you cannot use the IRR as a criterion for accepting the opportunity. O C. 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. The NPV using the cost of capital of 7.9% is $ million. (Round to three decimal places.) 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 capita is 7.9%, what does the NPV rule say? ..... 16- 10 15 20 Discount Rate (%) What does the IRR 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. B. There are two IRRS, so you cannot use the IRR as a criterion for accepting the opportunity. O C. 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. The NPV using the cost of capital of 7.9% is $ million. (Round to three decimal places.) 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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![**Coal Mining Project Financial Analysis**
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.
**NPV and IRR Analysis**
The graph below shows the Net Present Value (NPV) as a function of the discount rate. The discount rate is on the x-axis, ranging from 0% to 20%, while the NPV in millions of dollars is on the y-axis. The curve demonstrates how NPV changes with varying discount rates.
- The NPV starts positive, peaking at around a discount rate of approximately 10.62%, and then decreases as the discount rate increases.
- There are two points where the NPV crosses the x-axis, indicating there are two Internal Rate of Return (IRR) values.
**Decision Criteria Using NPV and IRR**
- **What does the IRR rule say about whether you should accept this opportunity?**
Choose the best option:
- A. The IRR is \( r = 10.62\%\), so accept the opportunity.
- B. **(Correct)** There are two IRRs, so you cannot use the IRR as a criterion for accepting the opportunity.
- C. Accept the opportunity because the IRR is greater than the cost of capital.
- D. Reject the opportunity because the IRR is lower than the 7.9% cost of capital.
- **Given:** If the cost of capital is 7.9%, calculate the NPV.
The NPV using the cost of capital of 7.9% is $[ \_\_\_\_ ]$ million. (Round to three decimal places.)
This analysis helps determine whether the investment in the new mine is financially viable, taking into account both the NPV and multiple IRR criteria.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F1c9732cb-ae4a-4d93-bf70-995c53334240%2F7aac61cd-e99d-4ca9-b81e-6bbc34d97786%2Fp2bhpl9_processed.png&w=3840&q=75)
Transcribed Image Text:**Coal Mining Project Financial Analysis**
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.
**NPV and IRR Analysis**
The graph below shows the Net Present Value (NPV) as a function of the discount rate. The discount rate is on the x-axis, ranging from 0% to 20%, while the NPV in millions of dollars is on the y-axis. The curve demonstrates how NPV changes with varying discount rates.
- The NPV starts positive, peaking at around a discount rate of approximately 10.62%, and then decreases as the discount rate increases.
- There are two points where the NPV crosses the x-axis, indicating there are two Internal Rate of Return (IRR) values.
**Decision Criteria Using NPV and IRR**
- **What does the IRR rule say about whether you should accept this opportunity?**
Choose the best option:
- A. The IRR is \( r = 10.62\%\), so accept the opportunity.
- B. **(Correct)** There are two IRRs, so you cannot use the IRR as a criterion for accepting the opportunity.
- C. Accept the opportunity because the IRR is greater than the cost of capital.
- D. Reject the opportunity because the IRR is lower than the 7.9% cost of capital.
- **Given:** If the cost of capital is 7.9%, calculate the NPV.
The NPV using the cost of capital of 7.9% is $[ \_\_\_\_ ]$ million. (Round to three decimal places.)
This analysis helps determine whether the investment in the new mine is financially viable, taking into account both the NPV and multiple IRR criteria.
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