Question

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 $ 635million 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 table. Bullock Mining has a required return of 12 percent on all of its gold mines. Year Cash Flow 0 − $ 635,000,000 1 89,000,000 2 105,000,000 3 130,000,000 4 173,000,000 5 205,000,000 6 155,000,000 7 145,000,000 8 122,000,000 9 − 45,000,000 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.

Answer 1

Note: Amounts are in $.

Years	Cash Flow	Cumulative Cash Flow	Payback Period	Formula for the column to the left
0	-635000000	-635000000
1	89000000	-546000000	Not yet paid back	=IF(AND(C2<0,C3>=0),A2+ABS(C2/B3),"Not yet paid back")
2	105000000	-441000000	Not yet paid back	=IF(AND(C3<0,C4>=0),A3+ABS(C3/B4),"Not yet paid back")
3	130000000	-311000000	Not yet paid back	=IF(AND(C4<0,C5>=0),A4+ABS(C4/B5),"Not yet paid back")
4	173000000	-138000000	Not yet paid back	=IF(AND(C5<0,C6>=0),A5+ABS(C5/B6),"Not yet paid back")
5	205000000	67000000	4.673170732	=IF(AND(C6<0,C7>=0),A6+ABS(C6/B7),"Not yet paid back")
6	155000000	222000000
7	145000000	367000000
8	122000000	489000000
9	-45000000	444000000
Total	444000000
IRR	13.02%	Formula =IRR(B2:B11)
MIRR	12.48%	Formula =MIRR(B2:B11,13.02%,12%)
NPV @ 12%	21547295.32	Formula =NPV(12%,B2:B11)
Payback Period	4.67 Years	(as calculated above)

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