P7-14 (similar to)

Question Help

You own a coal mining company and are considering opening a new mine. The mine itself will cost

$117

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. 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.)

A.

The IRR is

8.46%,

so accept the opportunity.

B.

Reject the opportunity because the IRR is lower than the

8.2%

cost of capital.

C.

Accept the opportunity because the IRR is greater than the cost of capital.

D.

There are two IRRs, so you cannot use the IRR as a criterion for accepting the opportunity.