Problem 3. Project Valuation

You own a lithium mining company and are considering opening a new mine today (time 0). The mine itself will cost $100 million to open. If this money is spent immediately (time 0) then starting one year from today (that is time 1) the mine will generate $20 million for the next 10 years (that is at time 1, time 2, and so on up to time 10). After that, the lithium will run out and the site must be cleaned and maintained at environmental standards. For the next ten years the annual cleaning and maintenance are expected to cost $1.8 million per year beginning with time 11.

a. What is the NPV of the project and should you invest if the firms cost of capital is 10%?

b. Would you use the IRR rule for evaluating this project? Why or why not?