Question

Bullock Gold Mining C eth 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. Year Cash Flow - $650,000,000 80,000,000 121,000,000 162,000,000 221,000,000 210,000,000 154,000,000 108,000,000 86,000,000 - 72.000.000 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 $650 million today, and it will have a cash outflow of $72 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 on this page. Bullock Gold Mining has a 12 percent required return on all of its gold mines. QUESTIONS 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 Flows( in million Dollars)	Cummulative Cash Flows	Discounted value of Cash Flows
0	-650	-650	-650
1	80	-570	71.42857143
2	121	-449	96.46045918
3	162	-287	115.3084001
4	221	-66	140.4494953
5	210	144	119.1596397
6	154	298	78.02119266
7	168	466	75.99466818
8	86	552	34.73395761
9	-72	480	-25.9639218
	Required Rate of Return	12%
	Payback period	4.31428571428571 Years
	Payback period is calculated	using the formula 4 + ( 66 / (66+144)) years
	Internal Rate of Return	13.25%
	NPV	55.5924624318485 Million Dollars
	Npv is the sum of Discounted	Cash Flows
	MIRR	4.188621%
	Mirr is calculated using [(outlay/initial investment)^0.5]-1