You own a coal mining company and are considering opening and maintenance are expected to cost $1.9 million per year in Use the graph below to determine the IRR(s) in the problem. NPV of the Investment. in the Coal Mine 10 15 a new mine. The mine will cost $117.1 million to open. If this money is spent immediately, the mine will generate $21.5 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 cleanin perpetuity. What does the IRR rule say about whether you should accept this opportunity? If the cost of capital is 8.1%, what does the NPV rule say? Q Q G Discount Rate (%) What does the IRR rule say about whether you should accept this opportunity? (Select the best choice below.) OA. Accept the opportunity because the IRR is greater than the cost of capital. OB. The IRR is r= 11.83 %, so accept the opportunity. OC. Reject the opportunity because the IRR is lower than the 8.1% cost of capital. OD. There are two IRRs, so you cannot use the IRR as a criterion for accepting the opportunity. The NPV using the cost of capital of 8.1% is $ million. (Round to three decimal places.) The plot of the NPV as a function of the discount rate is n-shaped. It intersects the x-axis at r 2.05% and r= 11.83 % What does the NPV rule say? (Select the best choice below.) OA. If the opportunity cost of capital is between r=2.05% and r= 11.83 %, the investment should be undertaken. OB. Reject the project because the NPV is negative. OC. If the opportunity cost of capital is less than r=2.05%, the investment should be undertaken. OD. If the opportunity cost of capital is greater than r= 11.83 % , the investment should be undertaken.
Net Present Value
Net present value is the most important concept of finance. It is used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. The difference between the present value of cash inflow and cash outflow is termed as net present value (NPV). It is used for capital budgeting and investment planning. It is also used to compare similar investment alternatives.
Investment Decision
The term investment refers to allocating money with the intention of getting positive returns in the future period. For example, an asset would be acquired with the motive of generating income by selling the asset when there is a price increase.
Factors That Complicate Capital Investment Analysis
Capital investment analysis is a way of the budgeting process that companies and the government use to evaluate the profitability of the investment that has been done for the long term. This can include the evaluation of fixed assets such as machinery, equipment, etc.
Capital Budgeting
Capital budgeting is a decision-making process whereby long-term investments is evaluated and selected based on whether such investment is worth pursuing in future or not. It plays an important role in financial decision-making as it impacts the profitability of the business in the long term. The benefits of capital budgeting may be in the form of increased revenue or reduction in cost. The capital budgeting decisions include replacing or rebuilding of the fixed assets, addition of an asset. These long-term investment decisions involve a large number of funds and are irreversible because the market for the second-hand asset may be difficult to find and will have an effect over long-time spam. A right decision can yield favorable returns on the other hand a wrong decision may have an effect on the sustainability of the firm. Capital budgeting helps businesses to understand risks that are involved in undertaking capital investment. It also enables them to choose the option which generates the best return by applying the various capital budgeting techniques.
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