Mini Case from Fundamentals of Corporate Finance (Ross) 9th edition Seth Bullock
ID: 2754915 • Letter: M
Question
Mini Case from Fundamentals of Corporate Finance (Ross) 9th edition
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 $600 million today, and it will have a cash outflow of $95 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 12 percent required return on all of its gold mines. 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? 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
Payback period
The cashflow gets recovered between 4 & 5 years
PBP = 4 years + 35000000/210000000 = 4.17years
For IRR, the PV of inflows = PV of ouflows
Equating above we get, IRR = 16.04%
NPV calculation is given above
Since, NPV is positive, fhe company should opt for the mine project.
Year Cash flow Cumulative cashflow PV @ 12% 0 -600000000 -600000000 -600000000 1 75000000 -525000000 66964285.71 2 120000000 -405000000 95663265.31 3 160000000 -245000000 113884839.7 4 210000000 -35000000 133458796.5 5 240000000 205000000 136182445.4 6 160000000 365000000 81060979.39 7 130000000 495000000 58805397.99 8 90000000 585000000 36349490.52 9 -95000000 490000000 -34257952.37 NPV 88111548.04