Accounting for Decision Making and Control 7th Edition by Jerold Zimmerman

Exercise 35

Dakota Mining
Dakota Mining is considering operating a strip mine, the cost of which is $4.4 million. Cash returns will be $27.7 million, all received at the end of the first year. The land must be returned to its natural state at a cost of $25 million, payable after two years. What is the project's internal rate of return?
Required:
a. Should the project be accepted if the market rate of return is 8 percent?
b. If the market rate of return is 14 percent?
Explain your reasoning.
Source: R. Watts.