Question

I only need help with 1 and 2 please :)

Chapter 9 Net Present MINICASE Year Bullock Gold Mining Sch Bullock, the owner of Bullock Gold Mining, is evaluat- ing a new gold mine in South Dakota. Dan Dority, the com- pany'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 Gar- rett, 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 Dew 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 an- mal operating expenses. Ir the company opens the mine, it will cost $635 million today, and it will have a cash outflow of 45 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 nie. Bullock Mining has a required return of percent on all of its gold mines. Cash Flow -$635,000,000 89,000,000 105.000.000 130,000,000 173,000,000 205,000,000 155,000,000 145,000,000 122,000,000 45,000,000 QUESTIONS 1. Construct a spreadsheet to calculate the payback period, internal rate of return, modified internal rate of return, and nel present value of the proposed mine. 2. Based on your analysis, should the company open the mine? 3. Bonus question: Most spreadsheets do not have a built-in formula to calculate the payback period. Write a VBA script that calculates the payback period for a project. 11

Answer 1

1.

B16 : X V fix =NPV(B12,B3:311)+B2 C A C 1 Year 20 3 1 4 2 5 3 64 7 5 8 6 97 10 8 11 9 12 Required Rate of Return 13 Payback Period 14 Internal Rate of Return 15 MIRR 16 NPV Cash Flow |-635000000 89000000 105000000 130000000 173000000 205000000 155000000 145000000 122000000 -45000000 |0.11 =A6+-C6/B7 =IRR(B2:B11) =MIRR(B2:B11, B12,B12) =NPV(B12,B3:B11)+B2 Cumulative CashFlow =B2 =C2+B3 =C3+B4 =C4+B5 =C5+B6 =C6+B7 =C7+B8 =C8+B9 =C9+B10 |=C10+B11

B16 X V fx =NPV(B12,B3:B11)+B2 - I А 1 Year nm torno covou owno CashFlow Cumulative Cash Flow -635000000 -635000000 89000000 -546000000 105000000 -441000000 130000000 -311000000 173000000 -138000000 205000000 67000000 155000000 222000000 145000000 367000000 122000000 489000000 -45000000 444000000 11% 4.67 13.02% 11.90% 49130613.03 11 12 Required Rate of Return 13 Payback Period 14 Internal Rate of Return 15 MIRR 16 NPV

2.

The primary tool for analysis is the NPV. In this case as the NPV>0, the project should be undertaken.