CHAPTER CASE BULLOCK GOLD MINING S eth Bullock, the owner of Bullock Gold Mining
ID: 2654500 • Letter: C
Question
CHAPTER CASE BULLOCK GOLD MINING S eth 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 S650 million today, and it will have a cash outflow of $72 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 on this page. Bullock Mining has a 12 percent required return on all of its gold mines. Year Cash Flow 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.Explanation / Answer
Net present value = 2844130
Payback period = 4.65 years
IRR= 12% + 1.4654 i.e 13.4654%
Comapny should accept the project as the NPV is greater
Particulars Year Cash flows PVF @ 12% PV PVF @ 20% PV @ 20% Initial cash outflow 0 65000000 1 65000000 1 65000000 Cash outflow Year 9 9 7200000 0.3606 2596320 0.1938 1395360 Present value of cash outflows 72200000 67596320 66395360 Cash inflows 1 8000000 0.8929 7143200 0.8333 6666400 Cash inflows 2 12100000 0.7972 9646120 0.6944 8402240 Cash inflows 3 16200000 0.7118 11531160 0.5787 9374940 Cash inflows 4 22100000 0.6355 14044550 0.4822 10656620 Cash inflows 5 21000000 0.5674 11915400 0.4019 8439900 Cash inflows 6 15400000 0.5066 7801640 0.3349 5157460 Cash inflows 7 10800000 0.4523 4884840 0.2791 3014280 Cash inflows 8 8600000 0.4039 3473540 0.2326 2000360 Present value of cash inflows 114200000 70440450 53712200 Net Present value 2844130 -12683160