You own a coal mining company and are considering opening a new mine. The mine will cost $115.4 million to open. If this money is spent immediately, the mine will generate $20.2 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 $1.6 million per year in perpetuity. What does the IRR rule say about whether you should accept this opportunity? If the cost of capital is 7.9%, what does the NPV rule say? Use the graph below to determine the IRR(s) in the problem. NPV of the Investment in the Coal Mine 16- 15 -14- Discount Rate (%) What does the IIRR rule say about whether you should accept this opportunity? (Select the best choice below.) O A. The IRR is r= 10.62%, so accept the opportunity. O B. There are two IRRS, so you cannot use the IRR as a criterion for accepting the opportunity. OC. Accept the opportunity because the IRR is greater than the cost of capital. O D. Reject the opportunity because the IRR is lower than the 7.9% cost of capital. NPV ($ millions)

You own a coal mining company and are considering opening a new mine. The mine will cost $115.4 million to open. If this money is spent immediately, the mine will generate $20.2 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 $1.6 million per year in perpetuity. What does the IRR rule say about whether you should accept this opportunity? If the cost of capital is 7.9%, what does the NPV rule say? Use the graph below to determine the IRR(s) in the problem. NPV of the Investment in the Coal Mine 16- 15 -14- Discount Rate (%) What does the IIRR rule say about whether you should accept this opportunity? (Select the best choice below.) O A. The IRR is r= 10.62%, so accept the opportunity. O B. There are two IRRS, so you cannot use the IRR as a criterion for accepting the opportunity. OC. Accept the opportunity because the IRR is greater than the cost of capital. O D. Reject the opportunity because the IRR is lower than the 7.9% cost of capital. NPV ($ millions)

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

Section: Chapter Questions

Problem 1PS

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You own a coal mining company and are considering opening a new mine. The mine will cost $120.0 million to open. If this money is spent immediately, the mine will generate $20.0 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 $2.0 million per year in perpetuity. What does the IRR rule say about whether you should accept this opportunity? If the cost of capital is 8.0%, what does the NPV rule say? Use the graph below to determine the IRR(S) in the problem. NPV of the Investment in the Coal Mine NPV ($ millions) 5 6 -15- 10 Discount Rate (%) 15 20 Q
You own a coal mining company and are considering opening a new mine. The mine will cost $119.5 million to open. If this money is spent immediately, the mine will generate $21.5 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 $1.6 million per year in perpetuity. What does the IRR rule say about whether you should accept this opportunity? If the cost of capital is 7.6%, what does the NPV rule say? NPV ($ mil पात 10 15 et Discount Rate (%) 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. There are two IRRS, so you cannot use the IRR as a criterion for accepting the opportunity. O C. Reject the opportunity because the IRR is lower than the 7.6% cost of capital. D. The IRR is r= 11.46%, so accept the opportunity.…
You own a coal mining company and are considering opening a new mine. The mine will cost $115.3 million to open. If this money is spent immediately, the mine will generate $21.8 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 8.4%, what does the NPV rule say?
You own a coal mining company and are considering opening a new mine. The mine itself will cost $116.1 million to open. If this money is spent immediately, the mine will generate $21.2 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? 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.) A. There are two IRRS, so you cannot use the IRR as a criterion for accepting the opportunity. B. Accept the opportunity because the IRR is greater than the cost of capital. C. The IRR is r= 11.65%, so accept the opportunity. D. Reject the opportunity because the IRR is lower than the 8.2% cost of capital. The NPV using the cost of capital of…
You own a coal mining company and are considering opening a new mine. The mine will cost $115.9 million to open. If this money is spent immediately, the mine will generate $20.1 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 8.2%, what does the NPV rule say?
You own a coal mining company and are considering opening a new mine. The mine will cost $117.1 million to open. If this money is spent immediately, the mine will generate $21.5 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 $1.9 million per year in perpetuity. What does the IRR rule say about whether you should accept this opportunity? If the cost of capital is 8.1%, what does the NPV rule say? Use the graph below to determine the IRR(s) in the problem. NPV ($ millions) 31- 21- NPV of the Investment in the Coal Mine 5 10 15 20 Discount Rate (%) 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. O B. The IRR is r= 11.83%, so accept the opportunity. O C. Reject the opportunity because the IRR is lower than the 8.1%…
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 twoIRRs, 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%…
You own a copper mine. The price of copper is currently $ 1.46 per pound. The mine produces 1.09 million pounds of copper per year and costs $ 2.01 million per year to operate. It has enough copper to operate for 100 years. Shutting the mine down would entail bringing the land up to EPA standards and is expected to cost $ 4.94million. Reopening the mine once it is shut down would be an impossibility given current environmental standards. The price of copper has an equal (and independent) probability of going up or down by 25 %each year for the next two years and then will stay at that level forever. Calculate the NPV of continuing to operate the mine if the cost of capital is fixed at 15.3%. Is it optimal to abandon the mine or keep it operating?
A plant manager is not sure whether he will get the approval to buy new equipment for automating an engine assembly line now or at some future time within the next three years. In order to have the money whenever he is given the go-ahead, he has asked you to tell him what the equipment is likelyto cost in each of the next three years. The cost of the equipment today is $300,000. How much will it cost at the end of years 1, 2, and 3, if the cost increases only by the inflation rate of 4% per year? Use a market interest rate of 15% per year.
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 associated costs of opening up mining operations will cost $100 million today. The mine is expected to generate $16 million worth of ore per year for the next 12 years. At the end of the 12th year Rearden will need to spend $20 million to restore the land to its original pristine nature appearance.The payback period for Rearden's mining operation is closest to:
A small strip-mining coal company is trying to decide whether it should purchase or lease a new clamshell. If purchased, the “shell” will cost $150,000 and is expected to have a $65,000 salvage value after 6 years. Alternatively, the company can lease a clamshell for only $20,000 per year, but the lease payment will have to be made at the beginning of each year. If the clamshell is purchased, it will be leased to other strip-mining companies whenever possible, an activity that is expected to yield revenues of $12,000 per year. If the company’s MARR is 15% per year, should the clamshell be purchased or leased on the basis of a future worth analysis? Assume the annual M&O cost is the same for both options.
Assume that you are planning to buy a property producing natural resources. You think you will keep the property for the next 23 years. You plan to spend $700 per acre. You will have incurred costs of $11 per acre for the 23 years prior to selling the property. You believe that you will receive $26/acre/year in revenue during the investment period. What price (at time of the future sale) will you need to get for the property under 2 MAR scenarios. (using both 5.8% and 8% as MAR).

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