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

$ 115

million to open. If this money is spent immediately, the mine will generate

$ 20

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

$ 1.8

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

8.1 %

,

what does the NPV rule say?

Question content area bottom

Part 1

What does the IRR rule say about whether you should accept this opportunity? (Select the best choice below.)

A.

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

B.

Reject the opportunity because the IRR is lower than the

8.1 %

cost of capital.

C.

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

D.

The IRR is

10.24 %

,

so accept the opportunity.

Part 2

If the cost of capital is

8.1 %

,

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

A.

The NPV rule cannot be used because there is no IRR.

B.

Since the NPV is greater than or equal to zero comma accept the opportunity.

C.

Since the NPV is less than zero comma reject the opportunity.

D.

The NPV rule cannot be used because there are two IRRs.