You own a coal mining company and are considering opening a new mine. The mine w

Question

You own a coal mining company and are considering opening a new mine. The mine will cost $118.6 million to open. If this money is spent immediately, the mine will generate $19.4 milion for the next 10 years. After that, the coal will run cut and the site must be de ned and maintained at environmental standards. The cleaning and maintenance are expected to cost $1.7 million per year in perpetuity. What does he RR le say about hether you should accept this opportunit ? t he cost capital is 7.8% 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 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 7.8% cost of capital. O B. Accept the opportunity because the IRR is greater than the cost of capital. C. There are two IRRs, so you cannot use the IRR as a criterion for accepting the opportunity The IRR is r-8.46%, so accept the opportunity. 0 D. The NPV using the cost of capital of 78% is SL 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 F 2.62% and r= 8.46% what does the NPV ruie say? (Select the best choice below) A. Reject the project because the NPV is negative. () B. If the opportunity cost of capital is less than r-2 62%, the investment should be undertaken. ° C. If the opportunity cost of capital is greater than r= 8.46%, the investment should be undertaken. D- the opportunity cost of capital is between r= 2.62% and r= 8.46%, the investment should be undertaken.

Explanation / Answer

a.) IRR is the rate of return at which NPV of the project is Zero.

From the graph, we can find that NPV=0 twice => it is a case of multiple IRRs

Hence, option-c is the right answer

b.) NPV using 7.8% cost of capital is =$ -118.60 + 19.4x{(1-(1+0.078)-10)/0.078} - 1.7/0.078/(1+0.078)10

                                                           =$ -118.60 + 131.36 - 10.28

                                                           =$ 2.48

Thus, NPV of the project is $2.48 million

c.) The project should be taken up when the project NPV is in the positive zone above the X-axis i.e when the opportunity cost of capital is between 2.62% and 8.46%

Hence, option-d is the right answer

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.