Andrew Coal Mining, Inc. is considering opening a strip mine, the cost of which is $8.8 million....

Question

Andrew Coal Mining, Inc. is considering opening a strip mine, the cost of which is $8.8 million. Cash flows will be $55.4 million, all coming at the end of one year. The land must be returned to its natural state at a cost of $50 million, payable after two years. Compute the IRR for this project. Should the project be accepted if required rate of return is 8 percent? Should the project be accepted if the required rate of return is 14 percent? Explain your reasoning. At what costs of capital, the project is acceptable. Plot the graph of NPV for this project.

Robert · Accepted Answer

The incremental project cash flows are as indicated below. 
Initial cost (t=0) = -$ 8.8 million 
Cash flows expected at the end of year 1 = $ 55.4 million 
Cash flows expected at the end of year 2 = -$ 50 million 
Let the IRR for the project be X% 
Then, 8.8 = 55.4/[1+(x/100)] – 50/55.

Andrew Coal Mining, Inc. is considering opening a strip mine, the cost of which is $8.8 million. Cash flows will be $55.4 million, all coming at the end of one year. The land must be returned to its...

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