5. Rearden Metals is considering opening a strip mining operation to provide some of the raw materials needed in producing Rearden metal. The initial purchase of the land and the as- sociated costs of opening up mining operations will cost $100 million today. The mine is expected to generate $30 million worth of ore per year for the next 10 years. In 11 years, when the project is over, Rearden will need to spend $200 million to restore the land to its original pristine natural appearance. Which of the following is FALSE? A) Rearden should only use the NPV rule in this case to determine whether to make this investment. B) Rearden could use either the NPV rule or the IRR rule in this case, and will get the same answer regardless of the cost of capital. C) In this case, the NPV will not necessarily be decreasing in the cost of capital or discount rate used. D) Rearden should not use the payback rule in this example because it is likely to be mis- leading. E) Rearden could make a mistake if it uses the IRR rule because of the way the cash flows are structured in this example.

5. Rearden Metals is considering opening a strip mining operation to provide some of the raw materials needed in producing Rearden metal. The initial purchase of the land and the as- sociated costs of opening up mining operations will cost $100 million today. The mine is expected to generate $30 million worth of ore per year for the next 10 years. In 11 years, when the project is over, Rearden will need to spend $200 million to restore the land to its original pristine natural appearance. Which of the following is FALSE? A) Rearden should only use the NPV rule in this case to determine whether to make this investment. B) Rearden could use either the NPV rule or the IRR rule in this case, and will get the same answer regardless of the cost of capital. C) In this case, the NPV will not necessarily be decreasing in the cost of capital or discount rate used. D) Rearden should not use the payback rule in this example because it is likely to be mis- leading. E) Rearden could make a mistake if it uses the IRR rule because of the way the cash flows are structured in this example.

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter8: Cost Analysis

Section: Chapter Questions

Problem 3E

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