Seth Bullock, the owner of Bullock Gold Mining, is evaluating a new gold mine in
ID: 2777334 • Letter: S
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 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 and the annual operating expenses. If the company opens the mine, it will cost $525 million today, and it will have a cash outflow of $35 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.
Cash Flow
A.) . 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.
b. Based on your analysis should the company open the mine?
c. 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.
Cash Flow
0 -525000000 1 74000000 2 97000000 3 125000000 4 157000000 5 185000000 6 145000000 7 125000000 8 102000000 9 -35000000Explanation / Answer
Answer (a) Year 0 1 2 3 4 5 6 7 8 9 Cash Flow -525000000 74000000 97000000 125000000 157000000 185000000 145000000 125000000 102000000 -35000000 Payback period calculation Cash Flow -525000000 74000000 97000000 125000000 157000000 185000000 145000000 125000000 102000000 -35000000 Net investment -525000000 -451000000 -354000000 -229000000 -72000000 113000000 Payback period 4 years 5 months No of months is calculated by using formula Balance net investment at the end of year 4/monthly cash inflows in year 5 IRR calculation 0 1 2 3 4 5 6 7 8 9 Cash Flow -525000000 74000000 97000000 125000000 157000000 185000000 145000000 125000000 102000000 -35000000 IRR 16% IRR = IRR(B14,K14) Modified IRR Calculation 0 1 2 3 4 5 6 7 8 9 Cash Flow -525000000 74000000 97000000 125000000 157000000 185000000 145000000 125000000 102000000 -35000000 FV of cash inflows at 12% 163590424 191460800.5 220292710.4 247042540 259911680 181888000 140000000 102000000 PV of cash outflows at 12% -525000000 -97057757 Total FV of cash inflows 1506186155 Total PV of outflows -622057757 MIRR = Square Root (FV of positive cash flows/PV of initial outlay and financing costs) MIRR (%) 155.61 Calculation of NPV 0 1 2 3 4 5 6 7 8 9 Cash Flow -525000000 74000000 97000000 125000000 157000000 185000000 145000000 125000000 102000000 -35000000 Required rate of return 0.12 Discounted Cash flows -525000000 82880000 121676800 175616000 247042540 326033211 286204289 276335176 252548244 -97057757 Net Present Value 1146278504 Answer (b) Based on the above calcuations, the company should open the mine Anwer (c ) Did not have experience with VBA coding and hence not answered
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