Question

Seth Bullock, the owner of Bullock Gold Mining, is evaluating a new gold mine in South Dakota. Den Dority.the compar's geologst. has just finishad his analysis of the mine site. He has estimated that the mine would be productive for eight years after whidh the gold would be completely minad Dan has taien an estimate of the gold depasits to Alma Garrett, the company's financial officer. Aima has been asked by Serh to perform an arysis of the new mine and present her recommendation on whether the company shouid open the new mine Almahas used the estimates provided by Dan to determine the revenues that coud be cxpected from the mine. She has also projected the expenco of opening the mine and the annualoperating expenses if the company opens the mine, it wil cost $9s0 miion today, and it wil have a cash outflow of $75 million nine years from today in costs associated with closing the mine and redaiming the araa surounding it. The expected cash fiows each year from the mine are shown in the following table. Bulock Mining has a 12 percent requred return on all of ts gold mines Year Cesh Flow 0 -5850,000,000 170000,000 1 190.000,000 205.000,000 265.000,000 3 4 5 235.000,000 170,000,000 6 7 160,000,000 105,000,000 -75,000.000 9 1. Construct a spreadsheet to cakulate the payback period, intemal rate of retutn modified intemal rate of return, and net present value of the proposed mine 2. Based on your analysis should the comparry open the miner Explain in detai the different measures which you have calculated for this case Spectically, provide an explanation of payteck period, IRR, MIRR and NPV. Asa explain how business use these for dedaons and the potential advantages/disadvantages of each.

Answer 1

B41 X ✓ fc =IRR(B30:B39) AA B. Year Cash flows PVIF@12% 29 30 0 $ 1/ $ 31 32 2 $ 33 3 $ 34 Cumulative Present value cash flows AxB (850.00) $ (850.00) 151.79$ (680.00) 151.47 $ (490.00) 145.91 $ (285.00) 168.41 $ (20.00) 133.35 $ 215.00 86.13 $ 385.00 72.38 $ 545.00 42.41 $ 650.00 (27.05) $ 575.00 4 $ (850) 170 190 205 265 235 170 160 105 (75) 1.000 $ 0.893 $ 0.797 $ 0.712 $ 0.636 $ 0.567 $ 0.507 $ 0.452 $ 0.404 $ 0.361 $ 35 5$ 6 $ 7 $ 37 8 $ 39 9 $ IRR 14.67% NPV 74.79 MIRR 13.02% Payback period 4.09 Years =4+20/235 =MIRR(B30:B39,12%,12%) 47 NPV is > $0. Mine should be opened.

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