You own a coal mining company and are considering opening a new mine. The mine w

Question

You own a coal mining company and are considering opening a new mine. The mine will cost $115.5 million to open. If this money is spent immediately, the mine will generate $21.4 million for the next 10 years. After that, the coal wll run out and the site must be cleaned and maintained at environmental standards. The cleaning and maintenance are expected to cost $1.7 million per year in perpetuity. What does the IRR rule say about whether you should accept this opportunity? If the cost of capital is 7.8%, what does the NPV rule say?

Explanation / Answer

The NPV Using the cost of Capital of 7.8% $ 29.40

and IRR rule say that 13.1345% as per given NPV

FUrthur here we a

have not considered Cleaning and maintanance cost $ 1.70 as its incurred after end 10 year

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