You own a coal mining company and are considering opening a new mine. The mine itself will cost $120 million to open. If this money is spent​ immediately, the mine will generate $21 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 $1.9 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 8.2%​, what does the NPV rule​ say? What does the IRR rule say about whether you should accept this​ opportunity? (Select the best choice​ below.) The IRR is 10.41%​, so accept the opportunity Accept the opportunity because the IRR is greater than the cost of capital. There are two​IRRs, so you cannot use the IRR as a criterion for accepting the opportunity. Reject the opportunity because the IRR is lower than the 8.2% cost of capital.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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You own a coal mining company and are considering opening a new mine. The mine itself will cost $120

million to open. If this money is spent​ immediately, the mine will generate $21 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 $1.9 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 8.2%​, what does the NPV rule​ say?

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

  1. The IRR is 10.41%​, so accept the opportunity
  2. Accept the opportunity because the IRR is greater than the cost of capital.
  3. There are two​IRRs, so you cannot use the IRR as a criterion for accepting the opportunity.
  4. Reject the opportunity because the IRR is lower than the 8.2% cost of capital.
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