Seth Bullock, the owner of Bullock Gold Mining, is evaluating a new gold mine in
ID: 2726304 • Letter: S
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 a detailed explanation for question 2 please in words, this is the answer I got, that I hope is correct?
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
Solution.
Calculation of payback period.
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
PBP = 4 + ( 5 / 205 ) = 4.02 year.
ii. Calculation of net present value.
Year
Cash Flow
Table value
P.V
0
(750.00)
1.0000
(750.00)
1
130.00
0.8928
116.06
2
180.00
0.7971
143.48
3
190.00
0.7117
135.22
4
245.00
0.6355
155.70
5
205.00
0.5674
116.32
6
155.00
0.5066
78.52
7
135.00
0.4523
61.06
8
95.00
0.4038
38.36
9
(75.00)
0.3606
(27.05)
NPV
67.68
iii. Calculation of IRR.
Year
Cash Flow
Table value
P.V
0
(750.00)
1.0000
(750.00)
1
130.00
0.8928
116.06
2
180.00
0.7971
143.48
3
190.00
0.7117
135.22
4
245.00
0.6355
155.70
5
205.00
0.5674
116.32
6
155.00
0.5066
78.52
7
135.00
0.4523
61.06
8
95.00
0.4038
38.36
9
(75.00)
0.3606
(27.05)
IRR
2.428%
( 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
Explanation / Answer
Seth Bullock, the owner of Bullock Gold Mining Interest Rate 12% 1 Year Cash Flow Cumulative Cash Flow 0 -750 -750 1 130 -620 2 180 -440 3 190 -250 4 245 -5 5 205 200 6 155 355 7 135 490 8 95 585 9 -75 510 Payback Period= 4.02 Years 2 Year Cash Flow 0 -750 -750.00 1 130 116.07 2 180 143.49 3 190 135.24 4 245 155.70 5 205 116.32 6 155 78.53 7 135 61.07 8 95 38.37 9 -75 -27.05 NPV= $67.75 3 Year Cash Flow 0 -750 1 130 2 180 3 190 4 245 5 205 6 155 7 135 8 95 9 -75 IRR= 15% 4 Year Cash Flow 0 -750 1 130 2 180 3 190 4 245 5 205 6 155 7 135 8 95 9 -75 MIRR= 15%
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