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: Bullock Gold Mining


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Assignment topic: Bullock Gold Mining
Format: APA
Number of pages: 2 pages / 550 words

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Chapter Case

Bullock Gold Mining

 

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.

Year       Cash Flow

0             −$625,000,000

1                   70,000,000

2                 129,000,000

3                 183,000,000

4                 235,000,000

5                 210,000,000

6                 164,000,000

7                 108,000,000

8                   86,000,000

9                −   90,000,000  

 

Alma has used the estimates provided by Dan to determine the revenues that could be expected from the mine. She also has projected the expense of opening the mine and the annual operating expenses. If the company opens the mine, it will cost $625 million today, and it will have a cash outflow of $90 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 nearby table. Bullock Gold Mining has a 12 percent required return on all of its gold mines.

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.
SOLUTION:
Data Input
Year Cash Flows Cumulative Cash Flows
     
0  $  (625,000,000.00)  $        (625,000,000.00)
1  $     70,000,000.00  $        (555,000,000.00)
2  $   129,000,000.00  $        (426,000,000.00)
3  $   183,000,000.00  $        (243,000,000.00)
4  $   235,000,000.00  $            (8,000,000.00)
5  $   210,000,000.00  $          202,000,000.00
6  $   164,000,000.00  $          366,000,000.00
7  $   108,000,000.00  $          474,000,000.00
8  $     86,000,000.00  $          560,000,000.00
9  $    (90,000,000.00)  $          470,000,000.00
Required Return 12.00%
Results  
   
Payback Period 4.04
Internal Rate of Return 15.32%
Modified Internal Rate of Return 13.47%
Net Present Value  $     73,320,458.17

 

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

According to my calculation, the Net Present Value is positive, payback period is less the life of the project that is provided thus once the initial investment is recovered, the company is sure to make profit. . Besides, the internal rate of return is great than the required value. The calculation has also indicated that the MIRR of the cash flow is greater than the rate of discount of capital cost, this is however a good indicator. Therefore, due to the above reasons, the company should open the mine because the is a high likelihood of success.

  1. 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.
  2. View Sample Solution Pdf

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