You own a coal mining company and are considering opening a new mine. The mine will cost $ 115.2 million to open. If this money is spent immediately, the mine will generate $ 21.3 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 7.7 %, 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.

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

B.Reject the opportunity because the IRR is lower than the

7.7 %7.7%

cost of capital.

C.The IRR is

r equals 12.21 %r=12.21%,

so accept the opportunity.

D.There are two

IRRs,

so you cannot use the IRR as a criterion for accepting the opportunity.

The NPV using the cost of capital of

7.7 %7.7%

is

$nothing

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

r equals 1.71 %r=1.71%

and

r equals 12.21 %r=12.21%

What does the NPV rule say? (Select the best choice below.)

A.

Reject the project because the NPV is negative.

B.If the opportunity cost of capital is greater than

r equals 12.21 %r=12.21%,

the investment should be undertaken.

C.If the opportunity cost of capital is between

r equals 1.71 %r=1.71%

and

r equals 12.21 %r=12.21%,

the investment should be undertaken.

D.If the opportunity cost of capital is less than

r equals 1.71 %r=1.71%,

the investment should be undertaken.