2. You own a coal mining company and are considering opening a new mine. The mine itself will cost $118 million to open. If this money is spent immediately, the mine will generate $19 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 $1.5 million per year in perpetuity beginning at the end of 10 year.

a) What does the IRR rule say about whether you should accept this opportunity?

b) If the cost of capital is 7.7%, what does the NPV rule say?

c) Plot NPV profile for this investment using discount rates from 1% to 20% in 1% increments. Confirm your answers in a)