Question

Bullock Gold Mine Case Study

Seth Bullock, the owner of Bullock Gold Mining, is evaluating a new gold mine in South Dakota. Dan Dority,
the company’s geologist, has just finished his analysis of the mine site. He has estimated that the mine would
be productive for eight years, after which the gold would be completely mined. Dan has taken an estimate of
the gold deposits to Alma Garrett, the company’s financial officer. Alma has been asked by Seth to perform
an analysis of the new mine and present her recommendation on whether the company should open the
new mine.
Alma has used the estimates provided by Dan to determine the revenues that could be expected from the
mine. She has also projected the expense of opening the mine and the annual operating expenses. If the
company opens the mine, it will cost $850 million today, and it will have a cash outflow of $120 million
nine years from today in costs associated with closing the mine and reclaiming the area surrounding it.
The expected cash flows each year from the mine are shown in the table that follows. Bullock has a
12 percent required return on all of its gold mines.

YEAR CASH FLOW
0   −$850,000,000
1 165,000,000
2 190,000,000
3   225,000,000
4 245,000,000
5 235,000,000
6 195,000,000
7 175,000,000
8 155,000,000
9 −120,000,000

1. Construct a spreadsheet to calculate the payback period, internal rate of return, modified internal rate of
return, and net present value of the proposed mine.

2. Based on your analysis, should the company open the mine?

Answer 1

Year	Cash flow(in milions)	Cumulative Cash flows(in mlns.)	PV F at 12%	PV at 12%
0	-850	-850	1	-850
1	165	-685	0.89286	147.32
2	190	-495	0.79719	151.47
3	225	-270	0.71178	160.15
4	245	-25	0.63552	155.70
5	235	210	0.56743	133.35
6	195	405	0.50663	98.79
7	175	580	0.45235	79.16
8	155	735	0.40388	62.60
9	-120	615	0.36061	-43.27
IRR	15%		NPV	95.27
MIRR	13%			millions
Payback period=4+(25/210)=
4.12
Years
2. YES.
As NPV is POSITIVE, &
both IRR & MIRR are > COC 12%

IRR calculations:

Equating the PVs of cash inflows & outflows at IRR,ie. r% to 0

IRR=-850+(165/(1+r)^1)+(190/(1+r)^2)+(225/(1+r)^3)+(245/(1+r)^4)+(235/(1+r)^5)+(195/(1+r)^6)+(175/(1+r)^7)+(155/(1+r)^8)-120/(1+r)^9)=0

& solving online,

we get the IRR as

15.33%

MIRR calculations:

MIRR= nth root of (Future value of cash inflows/PV of cash outflows)-1

where, n= no.of years

Year	Cash flow(in milions)	FV factor at 12%		FV at 12%	PV F at 12%	PV at 12%
0	-850				1	-850
1	165	(1+0.12)^8=	2.47596	408.5339
2	190	(1+0.12)^7=	2.21068	420.0295
3	225	(1+0.12)^6=	1.97382	444.1101
4	245	(1+0.12)^5=	1.76234	431.7737
5	235	(1+0.12)^4=	1.57352	369.777
6	195	(1+0.12)^3=	1.40493	273.961
7	175	(1+0.12)^2=	1.25440	219.52
8	155	(1+0.12)^1=	1.12000	173.6
9	-120				0.36061	-43.2732
		Total	2741.3052		-893.273
	MIRR=(2741.3052/893.273)^(1/9)-1
	13.27%