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 opes 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

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.

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

Answer 1

Year	Cash Flow(in $ 000,000)-A	Cumulative cash inflows			PVF@12%- B	Discounted Cash Flows [A*B]
0	-850				1	(850.00)
1	165	165			0.893	147.32
2	190	355			0.797	151.47
3	225	580			0.712	160.15
4	245	825			0.636	155.70
5	235	1060			0.567	133.35
6	295	1355			0.507	149.46
7	175	1530			0.452	79.16
8	155	1685			0.404	62.60
9	-120				0.361	(43.27)
						=SUM(G36:G45)
					NPV	145.93
	Pay Back Period
	Find the discounted cash outflow at the end of year 9					-43.27
	Cash outflow at year 0	-893.27	(Cash Outflow at year 0 + discounted cash flow at the end of year 9)
	Cumulative Cash inflow at the end of year 4		825
	Cumulative Cash inflow at the end of year 5		1060
	therefore the payback period will be in between year 4 & 5
			=4+ (-C52-D54)/1060
	Payback period=	4.06
	IRR	=IRR(B36:B45)
		17%
	NPV	=SUM(G36:G45)
	Since the NPV is positive he should open the mine