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 $635 million today, and it will have a cash outflow of $45 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. Bullock Mining has a required return of 12 percent on all of its gold mines.

Year    Cash Flow
0    −$635,000,000
1    89,000,000
2    105,000,000
3    130,000,000
4    173,000,000
5    205,000,000
6    155,000,000
7    145,000,000
8    122,000,000
9    −    45,000,000

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

Note:- Future Values and Present values have been calculated using PV and FV functions in excel based on the simple concept of (1+ rate) ^time

Required 1)

Required 2) Since NPV is positive and IRR and MIRR are greater than cost of capital of 12%, company should open the mine.

Required 3)

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