Does the movie have positive NPV if the cost of capital is 10.8%? If the cost of

Question

Does the movie have positive NPV if the cost of capital is 10.8%?

If the cost of capital is 10.8% the NPV is _____ million. ( round to two decimal places)

You own a coal mining company and are considering opening a new mine. The mine will cost $116.3 million to open. If this money is spent immediately, the mine wll generate $19.4 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 8.5%, what does the NPV rule say?

Explanation / Answer

1) IRR rule says that if internal rate of return of the project is greater than the the cost of capital then the project should be accepted . IRR is calculated below where the NPV would be zero at 8.595% - Thus if cost of capital is less then 8.595% then the project should be accepted.

Now if the Cost of Capital is 8.5% then NPV rule states that the NPV should be positive to accept the project. Below is the NPV calculated at 8.5% and it generates a postive NPV . thus project should be accepted

A B C D = A+B+C P P x D Year Initial Investment Revenue Yearly Cost Total Cash flow PV @8.595% Cash Flow Present Value 0 -116.3 -116.3 1 -116.30 1 19.4 -1.6 17.8 0.92085271 16.39 2 19.4 -1.6 17.8 0.847969713 15.09 3 19.4 -1.6 17.8 0.780855208 13.90 4 19.4 -1.6 17.8 0.719052634 12.80 5 19.4 -1.6 17.8 0.662141566 11.79 6 19.4 -1.6 17.8 0.609734855 10.85 7 19.4 -1.6 17.8 0.561475994 9.99 8 19.4 -1.6 17.8 0.51703669 9.20 9 19.4 -1.6 17.8 0.476114637 8.47 10 19.4 -1.6 17.8 0.438431454 7.80 Net Present Value 0.00

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