Question 1 Presley Gold Mining Elvis Presley, the owner of Presley Gold Mining,

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Question 1 Presley Gold Mining Elvis Presley, the owner of Presley 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 Elvis to perform an analysis of the new mine and present her recommendation on whether the company s hould 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 mine and the annual operating expenses. If the company opens the mine, will cost $650 million today, and it will have a cash outflow of S72 million nine years from today in costs associated with closing the mine and reclaiming the area surrounding it. The expected cash flows each the expense of opening the r from the mine are shown in the table on this page. yea Presley 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. 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

QUESTION 1: 1) Step 1: Computation of pay back period Year Amount ($ in millions) Balance recovery 0 -650 -650 1 80 -570 2 121 -449 3 162 -287 4 221 -66 5 210 144 6 154 7 108 8 86 9 72 at the end of 4th year company has to receive another $ 66 million. Inflow in the 5th year is more than balance recovery amount So, in the middle of 5th year company receiving the entire amount of outflow Payback period = base year + balace recovery / income from 5th year                                 = 4 +   66/210                         = 4 years 115 days (Approx) Step 2: NPV Year Amount ($ in millions) PVF @ 12% Present value 0 -650 1 -650 1 80 0.892857 71.42857 2 121 0.797194 96.46046 3 162 0.71178 115.3084 4 221 0.635518 140.4495 5 210 0.567427 119.1596 6 154 0.506631 78.02119 7 108 0.452349 48.85372 8 86 0.403883 34.73396 9 72 0.36061 25.96392 NPV 80.37935 Since NPV is positive, We can accept the project STEP 3: IRR option 1 option 2 Year Amount ($ in millions) PVF @ 12% Present value PVF @ 15% Present value 0 -650 1 -650 1 -650 1 80 0.892857 71.42857 0.86956522 69.56522 2 121 0.797194 96.46046 0.75614367 91.49338 3 162 0.71178 115.3084 0.65751623 106.5176 4 221 0.635518 140.4495 0.57175325 126.3575 5 210 0.567427 119.1596 0.49717674 104.4071 6 154 0.506631 78.02119 0.4323276 66.57845 7 108 0.452349 48.85372 0.37593704 40.6012 8 86 0.403883 34.73396 0.32690177 28.11355 9 72 0.36061 25.96392 0.28426241 20.46689 NPV 80.37935 4.100909 IRR = RATE AT OPTION 1+ NPV1 / NPV1- NPV 2 * (RATE2- RATE1)          = 12+ 80.37/80.37-4.10 * (15-12) = 15.16% 2) Based on the above calculations, Company has positive NPV and company 's IRR is more than the cost of capital. So Company can start mine.

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