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 $850 million today, and it will have a cash outflow of $120 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 table that follows. Bullock has a 12 percent required return on all of its gold mines.

YEAR CASH FLOW

0	−$850,000,000
1	165,000,000
2	190,000,000
3	225,000,000
4	245,000,000
5	235,000,000
6	195,000,000
7	175,000,000
8	155,000,000
9	−120,000,000

Questions:
1. Construct a spreadsheet to calculate the payback period, internal rate of return, modified internal rate of return, and the net present value of the proposed mine.

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

Answer 1

2.Based on the analysis the company should open the mine since the NPV is positive ,the IRR is greater than the cost of capital and the MIRR is also greater than the cost of capital.Also the payback period is also within the life span of the project.