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 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 $750 million today, and it will have a cash outflow of $75 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 following table. Bullock Mining has a 12 percent required return on all of its gold mines.

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? Explain in detail the different measures which you have calculated for this case. Specifically, provide an explanation of payback     period, IRR, MIRR and NPV. Also, explain how business’ use these for decisions and the potential advantages/disadvantages of each.

Can i get to get a detailed explanation for question 2 please?

Thank you for your help!

Year Cash Flow 0 -$750,000,000 1 130,000,000 2 180,000,000 3 190,000,000 4 245,000,000 5 205,000,000 6 155,000,000 7 135,000,000 8 95,000,000 9 -75,000,000

Explanation / Answer

Solution.

Calculation of payback period.

PBP = 4 + ( 5 / 205 ) = 4.02 year.

ii. Calculation of net present value.

iii. Calculation of IRR.

( Used Excell Formula )

Year Cash Flow Cumulative 1                130.00            130.00 2                180.00            310.00 3                190.00            500.00 4                245.00            745.00 5                205.00            950.00 6                155.00        1,105.00 7                135.00        1,240.00 8                  95.00        1,335.00 9                (75.00)        1,260.00

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