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Internal rate of return

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Reference no: EM132355715

The following set-up pertains to the following three questions

The Utah Mining Co. is opened a new coal mine Provo, Utah.The mine cost was $900,000 and has an economic life of 10 years. It will generate cash inflow of $175,000 next year and will be equal over the life of the project. Abandonment cost will be $145,000 at the end of year 10 , The cost of capital for the project is 8 %.

According to the decision rule for the "internal rate of return", is this project a wise investment for the company?

a. The annual IRR is 1 1 .38 % and the investment does not create wealth for the company.

b. The annual IRR is 12.42 % and the investment does not create wealth for the company.

c . The annual IRR is 13.2 % and the investment does not create wealth for the company.

d . The annual IRR is 11.38 % and the investment does create wealth for the company.

e . The annual IRR is 13.2 % and the investment does create wealth for the company a new coal mine near 

In year 2 an explosion occurred in the mine causing several injuries to workers. The company needed to compensate workers for a total of $250,000. The cost of repairing the mine and continuing it is $800,000. According to the decision rule for the "internal rate of return", is continuing with the project a wise investment for the company?

a. The annual IRR is 9.06 % and the investment does not create wealth for the company.

b. The annual IRR is 12.42 % and the investment does not create wealth for the company. 

c. The annual IRR is 12.42 % and the investment does create wealth for the company.

d. The annual IRR is 9.06 % and the investment does create wealth for the company The annual IRR is irrelevant for the decision.

Assume that after the explosion and in order to continue with the project Utah mining has to borrow money at 10.5 % , would the decision to continue with the project differ.

a. The annual IRR is still the same but the investment does not create wealth for the company anymore. 

b. The annual IRR changes and the investment does create wealth for the company.

C. annual IRR changes and the investment does not create wealth for the company anymore.

d. The annual IRR is irrelevant for the decision.

E. The orrowing rate is irrelevant to the decision. anymore.

Reference no: EM132355715

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