Determine the IRR on the strip-mine proposal in Problem 4 of Exercise 16.2. Should the mine be developed, given the mining company’s 15% cost of capital?
In Problem 4
A proposed strip mine would require the investment of $2 million at the beginning of the first year and a further investment of $3 million at the end of the first year. Mining operations are expected to yield annual year-end profits of $1 million starting in Year 2. The ore body will sustain 10 years of mining operations. At the end of the last year of operations, the mining company would also have to spend $1 million on environmental restoration.