Question

Titlas Gold Mining Seth Titals, the owner of Titals 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 sixteen 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 $200000 today, and it will have a cash outflow of 33000 in sixteen years from today in costs associated with closing the mine and reclaiming the area surrounding it. She has spend $100000 for testing the soil. The expected cash flows each year from the mine are shown in the table. Titals Mining has a 18 percent required return on all of its gold mines.

year 0	-200000
year 1	17000
year 2	18000
year 3	17000
year 4	17000
year 5	23000
year 6	17000
year 7	17000
year 8	17000
year 9	17000
year 10	350000
year 11	350000
year 12	350000
year 13	350000
year 14	28000
year 15	25000
year 16	33000

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?

3. The company was given an option to receive consultancy fee 1000000 per year for sixteen years or to engage in gold mining. Do you think you should include this revenue while estimating the cost of investment? Discuss?

no more information because they provide only like this

Answer 1

Based on the given data, pls find below workings on the Cash Flow Projections and other factors;

- Assumption: It is assumed that the soil testing cost is exclusively spent on this mine and hence it is considered as part of the initial spent;

1) & 2) Based on the below workings, the NPV of the project is negative -ve $6032 and IRR as well as MIRR are lower than 18% and also, the Payback period is much longer than the period of the mine; In this aspect, accepting this Mine is not a feasible option;

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Terminal Year 0 -2,00,000 (in $) Cost of Opening the Mine Cost of Closing and reclaiming area Cost of Soil Testing -33,000 -1,00,000 Net Cash Flows 17,000 18,000 17,000 17,000 23,000 17,000 17,000 17,000 17,000 3,50,000 3,50,000 3,50,000 3,50,000 28,000 25,000 33,000 -3,00,000 1 Net Operating Cash Flow Discounting Factor Discounted Cash Flow Cumulative Discounted Cash Flow Payback period -3,00,000 -3,00,000 17,000 18,000 17,000 17,000 23,000 17,000 17,000 17,000 17,000 3,50,000 3,50,000 3,50,000 3,50,000 28,000 25,000 33,000 -33,000 0.8475 0.7182 0.6086 0.5158 0.4371 0.3704 0.3139 0.2660 0.2255 0.1911 0.1619 0.1372 0.1163 0.0985 0.0835 0.0708 0.0600 14,407 12,927 10,347 8,768 10,054 6,297 5,337 4,523 3,833 66,873 56,672 48,027 40,701 2,759 2,088 2,336 -1,979 -2,85,593 -2,72,666 -2,62,319 -2,53,551 -2,43,497 -2,37,200 -2,31,863 -2,27,341 -2,23,508 -1,56,635 -99,964 -51,937 -11,236 -8,477 -6,389 -4,053 -6,032 12 12 12 12 12 12 12 12 12 12 12 12 12 12 12 12 12 NPV IRR MIRR Payback Period in no.of years -6,032 17.75% 17.86% 17.0 Discounting Factor 18.00%

3) The company was given an option to receive consultancy fee 1000000 per year for sixteen years or to engage in gold mining. Do you think you should include this revenue while estimating the cost of investment?

Answer: This is an option, but not the one which is existing and because of the acceptance of the Project, this fee is lost; This sounds more like an option of either to choose consultancy fee or to choose Mine; Both are mutually exclusive Projects as far as this Capital budgeting planning is concerned; Hence, this cannot be considered as Opportunity cost for Mining Project.

- Assumption: If the assumption is that the the soil testing cost is NOT exclusively spent on this mine, then the costs need not to be considered and hence the calculations shall be as below:

Based on the above assumption, the NPV of the Mine is positive and IRR and MIRR as well higher than 18% and Payback period is 11 years; In this case, the Mining Project is feasible to open.

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Terminal Year 0 -2,00,000 (in $) Cost of Opening the Mine Cost of Closing and reclaiming area Cost of Soil Testing -33,000 Net Cash Flows 17,000 18,000 17,000 17,000 23,000 17,000 17,000 17,000 17,000 3,50,000 3,50,000 3,50,000 3,50,000 28,000 25,000 33,000 -2,00,000 1 Net Operating Cash Flow Discounting Factor Discounted Cash Flow Cumulative Discounted Cash Flow Payback period -2,00,000 -2,00,000 17,000 18,000 17,000 17,000 23,000 17,000 17,000 17,000 17,000 0.8475 0.7182 0.6086 0.5158 0.4371 0.3704 0.3139 0.2660 0.2255 14,407 12,927 10,347 8,768 10,054 6,297 5,337 4,523 3,833 -1,85,593 -1,72,666 -1,62,319 -1,53,551 -1,43,497 -1,37,200 -1,31,863 -1,27,341 -1,23,508 12 12 12 12 12 12 12 12 12 3,50,000 3,50,000 3,50,000 3,50,000 28,000 25,000 33,000 -33,000 0.1911 0.1619 0.1372 0.1163 0.0985 0.0835 0.0708 0.0600 66,873 56,672 48,027 40,701 2,759 2,088 2,336 -1,979 -56,635 36 48,063 88,764 91,523 93,611 95,947 93,968 12 12 -0 NPV IRR MIRR Payback Period in no.of years 93,968 23.08% 20.68% 11.0 Discounting Factor 18.00%