Question

Q # 3 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 $600 million today. Bullock Mining has a

12 percent required return on all of its gold mines.

Year Cash Flow

0 -$600,000,000

1 75,000,000

2 120,000,000

3 160,000,000

4 210,000,000

5 240,000,000

6 160,000,000

7 130,000,000

8 90,000,000

Calculate the payback period, discounted payback period and Net present value. Further based

on your analysis, should the company open the mine?