You own a coal mining company and are considering opening a new mine. The mine will cost $119.2 million to open. If this money is spent immediately, the mine will generate S21.3 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 $1.8 million per year in perpetuity. What does the IRR rule say about whether you should accept this opportunity? If the cost of capital is 8.1%, what does the NPV rule say? Use the graph below to determine the IRR(s) In the problem. NPV of the Investment in the Coal Mine NPV ($ millions) 10 150 Discount Rate(%) What does the IRR rule say about whether you should accept this opportunity? (Select the best choice below.) O A Reject the opportunity because the IRR is lower than the 8.1% cost of capital. OB. Accept the opportunity because the IRR is greater than the cost of capital. C. There are two IRRs, so you cannot use the IRR as a criterion for accepting the opportunity. OD The IRR is r= 11.11%, so accept the opportunity The NPV using the cost of capital of 8.1% is $1 million (Round to three decimal places.) Your firm is considering a project that will cost $4.686 million up front, generate cash flows of $3.54 million per year for 3 years, and then have a cleanup and shutdown cost of $5.97 million in the fourth year. a. How many IRRs does this project have? b. Calculate a modified IRR for this project assuming a discount and compounding rate of 9.7%. c. Using the MIRR and a cost of capital of 9.7%, would you take the project? a. How many IRRs does this project have? The project has 2 IRRs. (Select from the drop-down menu.) b. Calculate a modified IRR for this project assuming a discount and compounding rate of 9.7%. The MIRR for this project is %. (Round to two decimal places.) You own a coal mining company and are considering opening a new mine. The mine will cost $119.2 million to open. If this money is spent immediately, the mine will generate S21.3 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 $1.8 million per year in perpetuity. What does the IRR rule say about whether you should accept this opportunity? If the cost of capital is 8.1%, what does the NPV rule say? Use the graph below to determine the IRR(s) In the problem. NPV of the Investment in the Coal Mine NPV ($ millions) 10 150 Discount Rate(%) What does the IRR rule say about whether you should accept this opportunity? (Select the best choice below.) O A Reject the opportunity because the IRR is lower than the 8.1% cost of capital. OB. Accept the opportunity because the IRR is greater than the cost of capital. C. There are two IRRs, so you cannot use the IRR as a criterion for accepting the opportunity. OD The IRR is r= 11.11%, so accept the opportunity The NPV using the cost of capital of 8.1% is $1 million (Round to three decimal places.) Your firm is considering a project that will cost $4.686 million up front, generate cash flows of $3.54 million per year for 3 years, and then have a cleanup and shutdown cost of $5.97 million in the fourth year. a. How many IRRs does this project have? b. Calculate a modified IRR for this project assuming a discount and compounding rate of 9.7%. c. Using the MIRR and a cost of capital of 9.7%, would you take the project? a. How many IRRs does this project have? The project has 2 IRRs. (Select from the drop-down menu.) b. Calculate a modified IRR for this project assuming a discount and compounding rate of 9.7%. The MIRR for this project is %. (Round to two decimal places.)
