You own a coal mining company and are considering opening a new mine. The mine will cost $115.9 million to open. If this money is spent immediately, the mine will generate $20.1 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 $1.8 million per year in perpetuity. What does the IRR rule say about whether you should accept this opportunity? If the cost of capital is
You own a coal mining company and are considering opening a new mine. The mine will cost $115.9 million to open. If this money is spent immediately, the mine will generate $20.1 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 $1.8 million per year in perpetuity. What does the IRR rule say about whether you should accept this opportunity? If the cost of capital is
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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Question
You own a coal mining company and are considering opening a new mine. The mine will cost
$115.9
million to open. If this money is spent immediately, the mine will generate
$20.1
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
$1.8
million per year in perpetuity. What does the
8.2%,
what does the
Transcribed Image Text:You own a coal mining company and are considering opening a new mine. The mine will cost $115.9 million to open. If this money is spent immediately, the mine will generate $20.1 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 $1.8 million per year in perpetuity. What does the IRR rule say about whether you should accept this opportunity? If the
cost of capital is 8.2%, what does the NPV rule say?
Use the graph below to determine the IRR(s) in the problem.
NPV of the Investment
in the Coal Mine
22-
12-
10
15
20
-8-
-18-
Discount Rate (%)
What does the IRR rule say about whether you should accept this opportunity? (Select the best choice below.)
A. Reject the opportunity because the IRR is lower than the 8.2% cost of capital.
B. There are two IRRS, so you cannot use the IRR as a criterion for accepting the opportunity.
C. Accept the opportunity because the IRR is greater than the cost of capital.
D. The IRR is r= 10.17%, so accept the opportunity.
NPV ($ millions)
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