Create an NPV profile for this project

Your firm is considering a project that will cost $4.55 million up front, generate cash flows of $3,500,000 per year for three years, and then have a cleanup and shutdown cost of $6,000,000 in the fourth year.

a. How many IRRs does this project have?

b. Create an NPV profile for this project. (Plot the NPV as a function of the discount rate—see the Appendix.)

c. Given a cost of capital of 10%, should this project be accepted? Justify your answer.

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 $20 million every year 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 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%, what does the NPV rule say?

Solution: