Corporate Finance Plus MyLab Finance with Pearson eText -- Access Card Package (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)
4th Edition
ISBN: 9780134408897
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Chapter 7, Problem 16P
You own a coal mining company and are considering opening a new mine. The mine itself will cost $120millon to open. If this money is spent immediately, the mine will generate $20 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 $2 million per year in perpetuity. What does the
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You own a coal mining company and are considering opening a new mine. The mine itself will cost $120
million to open. If this money is spent immediately, the mine will generate $21 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 $1.9 million per year in perpetuity. What does the IRR rule say about whether you should accept this opportunity?
(Hint: Consider the number of sign changes in the cash flows.) If the cost of capital is 8.2%, what does the NPV rule say?
What does the IRR rule say about whether you should accept this opportunity? (Select the best choice below.)
The IRR is 10.41%, so accept the opportunity
Accept the opportunity because the IRR is greater than the cost of capital.
There are twoIRRs, so you cannot use the IRR as a criterion for accepting the opportunity.
Reject the opportunity because the IRR is lower than the 8.2%…
You own a coal mining company and are considering opening a new mine. The mine will cost $120.0 million to open. If
this money is spent immediately, the mine will generate $20.0 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 $2.0 million per year in perpetuity. What does the IRR rule say about whether you should accept
this opportunity? If the cost of capital is 8.0%, what does the NPV rule say?
Use the graph below to determine the IRR(S) in the problem.
NPV of the Investment
in the Coal Mine
NPV ($ millions)
5
6
-15-
10
Discount Rate (%)
15
20
Q
You own a coal mining company and are considering opening a new mine. The mine will cost $119.5 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 cleaning and
maintenance are expected to cost $1.6 million per year in perpetuity. What does the IRR rule say about whether
you should accept this opportunity? If the cost of capital is 7.6%, what does the NPV rule say?
NPV ($ mil
पात
10
15
et
Discount Rate (%)
What does the IRR rule say about whether you should accept this opportunity? (Select the best choice below.)
A. Accept the opportunity because the IRR is greater than the cost of capital.
B. There are two IRRS, so you cannot use the IRR as a criterion for accepting the opportunity.
O C. Reject the opportunity because the IRR is lower than the 7.6% cost of capital.
D. The IRR is r= 11.46%, so accept the opportunity.…
Chapter 7 Solutions
Corporate Finance Plus MyLab Finance with Pearson eText -- Access Card Package (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)
Ch. 7.1 - Explain the NPV rule for stand-alone projects.Ch. 7.1 - What does the difference between the cost of...Ch. 7.2 - Prob. 1CCCh. 7.2 - If the IRR rule and the NPV rule lead to different...Ch. 7.3 - Can the payback rule reject projects that have...Ch. 7.3 - Prob. 2CCCh. 7.4 - For mutually exclusive projects, explain why...Ch. 7.4 - What is the incremental RR and what are its...Ch. 7.5 - Prob. 1CCCh. 7.5 - Prob. 2CC
Ch. 7 - Your brother wants to borrow 10,000 from you. He...Ch. 7 - You are considering investing in a start-up...Ch. 7 - You are considering opening a new plant. The plant...Ch. 7 - Your firm is considering the launch of a new...Ch. 7 - Bill Clinton reportedly was paid 15 million to...Ch. 7 - FastTrack Bikes, Inc. is thinking of developing a...Ch. 7 - OpenSeas, Inc. is evaluating the purchase of a new...Ch. 7 - You are CEO of Rivet Networks, maker of ultra-high...Ch. 7 - You are considering an investment in a clothes...Ch. 7 - You have been offered a very long term investment...Ch. 7 - You are considering opening a new plant. The plant...Ch. 7 - Bill Clinton reportedly was paid 15 million to...Ch. 7 - Prob. 13PCh. 7 - Innovation Company is thinking about marketing a...Ch. 7 - You have 3 projects with the following cash flows:...Ch. 7 - You own a coal mining company and are considering...Ch. 7 - Prob. 17PCh. 7 - Prob. 18PCh. 7 - Prob. 19PCh. 7 - Prob. 20PCh. 7 - You are a real estate agent thinking of placing a...Ch. 7 - Prob. 22PCh. 7 - You are deciding between two mutually exclusive...Ch. 7 - You have just started your summer Internship, and...Ch. 7 - Prob. 25PCh. 7 - Prob. 26PCh. 7 - Prob. 27PCh. 7 - Prob. 28PCh. 7 - Prob. 29PCh. 7 - Prob. 30PCh. 7 - Prob. 31PCh. 7 - Prob. 32PCh. 7 - Prob. 33PCh. 7 - Orchid Biotech Company is evaluating several...
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- You own a coal mining company and are considering opening 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 cleaning and maintenance are expected to cost $1.9 million per year in perpetuity. What does the IRR rule say about whether you should accept this opportunity? If the cost of capital is 8.1%, what does the NPV rule say? Use the graph below to determine the IRR(s) in the problem. NPV ($ millions) 31- 21- NPV of the Investment in the Coal Mine 5 10 15 20 Discount Rate (%) What does the IRR rule say about whether you should accept this opportunity? (Select the best choice below.) A. Accept the opportunity because the IRR is greater than the cost of capital. O B. The IRR is r= 11.83%, so accept the opportunity. O C. Reject the opportunity because the IRR is lower than the 8.1%…arrow_forwardYou own a coal mining company and are considering opening a new mine. The mine itself will cost $116.1 million to open. If this money is spent immediately, the mine will generate $21.2 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 $1.9 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? What does the IRR rule say about whether you should accept this opportunity? (Select the best choice below.) A. There are two IRRS, so you cannot use the IRR as a criterion for accepting the opportunity. B. Accept the opportunity because the IRR is greater than the cost of capital. C. The IRR is r= 11.65%, so accept the opportunity. D. Reject the opportunity because the IRR is lower than the 8.2% cost of capital. The NPV using the cost of capital of…arrow_forwardLast partarrow_forward
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