Question

CHAPTER CASE

Bullock Gold Mining

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.

Year	Cash Flow
0	−$625,000,000
1	70,000,000
2	129,000,000
3	183,000,000
4	235,000,000
5	210,000,000
6	164,000,000
7	108,000,000
8	86,000,000
9	− 90,000,000

Alma has used the estimates provided by Dan to determine the revenues that could be expected from the mine. She also has projected the expense of opening the mine and the annual operating expenses. If the company opens the mine, it will cost $625 million today, and it will have a cash outflow of $90 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 nearby table. Bullock Gold Mining has a 12 percent required return on all of its gold mines.

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.

2. Based on your analysis, should the company open the mine?

3. Bonus question: Most spreadsheets do not have a built-in formula to calculate the payback period. Write a VBA script that calculates the payback period for a project.

Answer 1

Yes the company should open the mine since the NPV is positive and the IRR and the MIRR are both higher than the cost of capital.All of which indicates that the project is viable.

The VBA script

Function PAYBACK(invest, finflow)
    Dim b As Double, w As Double
    Dim q As Integer, g As Integer
    b = Abs(invest)
    g = 1
    q = finflow.Count
    Do
        b = b - w
        w = finflow.Cells(g).Value
        If b = w Then
            PAYBACK = g
            Exit Function
        ElseIf b < w Then
            P = g - 1
            Z = b / w
            PAYBACK = P + Z
            Exit Function
        End If
        g = g + 1
    Loop Until g > q
    PAYBACK = "no payback"
End Function

The result:(formula in the screenshot)