Seth Bullock, the owner of Bullock Gold Mining, is evaluating a new gold mine in

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 five years, after which the mine would be worth nothing. 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 $45 million today, and the expected cash flows each year from the mine are shown in the table. Bullock Mining has a 10% required return on all of its gold mines.

QUESTIONS

1. Construct a spreadsheet using Excel to calculate the net present value, and internal rate of return of the proposed mine.

2. Calculate the payback period, with a cutoff of 4 years.

3. Based on your analysis, should the company open the gold mine based on the payback method? NPV? IRR?

Year = 0 -$45,000,000 Year = 1 +$6,300,000 Year = 2 +$8,500,000 Year = 3 +$15,000,000 Year = 4 +$95,000,000 Year = 5 +$7,500,000

WITH EXCEL FORMULA PLEASE

Explanation / Answer

1-

Year

present value of cash flow = cash flow/(1+r)^n r= 10%

0

-45000000

-45000000

1

6300000

5727272.7

2

8500000

7024793.4

3

15000000

11269722

4

95000000

64886278

5

7500000

4656909.9

Net present value

sum of present value of cash flow

48564976

IRR = using IRR function in MS excel

irr(-45000000,6300000,8500000,15000000,95000000,7500000)

35.62%

2-

Year

cash flow

cumulative cash flow

0

45000000

1

6300000

6300000

2

8500000

14800000

3

15000000

29800000

4

95000000

15200000

Amount to be recovered in Year 4

5

7500000

Pay back period in years

year before final recovery+(amount to be recovered/cash flow of final year of recovery)

3+(15200000/95000000)

3.16

3-

Yes Mine should be opened as NPV is positive, IRR is more than required rate of return and payback period is less than the cut off period

1-

Year

present value of cash flow = cash flow/(1+r)^n r= 10%

0

-45000000

-45000000

1

6300000

5727272.7

2

8500000

7024793.4

3

15000000

11269722

4

95000000

64886278

5

7500000

4656909.9

Net present value

sum of present value of cash flow

48564976

IRR = using IRR function in MS excel

irr(-45000000,6300000,8500000,15000000,95000000,7500000)

35.62%

2-

Year

cash flow

cumulative cash flow

0

45000000

1

6300000

6300000

2

8500000

14800000

3

15000000

29800000

4

95000000

15200000

Amount to be recovered in Year 4

5

7500000

Pay back period in years

year before final recovery+(amount to be recovered/cash flow of final year of recovery)

3+(15200000/95000000)

3.16

3-

Yes Mine should be opened as NPV is positive, IRR is more than required rate of return and payback period is less than the cut off period

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