Bullock Gold Mine Case Study
Seth Bullock, the owner of Bullock Gold Mining, is evaluating anew gold mine in South Dakota. Dan Dority,
the companyâs geologist, has just finished his analysis of the minesite. He has estimated that the mine would
be productive for eight years, after which the gold would becompletely mined. Dan has taken an estimate of
the gold deposits to Alma Garrett, the companyâs financial officer.Alma has been asked by Seth to perform
an analysis of the new mine and present her recommendation onwhether the company should open the
new mine.
Alma has used the estimates provided by Dan to determine therevenues that could be expected from the
mine. She has also projected the expense of opening the mine andthe annual operating expenses. If the
company opens the mine, it will cost $850 million today, and itwill have a cash outflow of $120 million
nine years from today in costs associated with closing the mine andreclaiming the area surrounding it.
The expected cash flows each year from the mine are shown in thetable that follows. Bullock has a
12 percent required return on all of its gold mines.
YEAR CASH FLOW
0 â$850,000,000
1 165,000,000
2 190,000,000
3 225,000,000
4 245,000,000
5 235,000,000
6 195,000,000
7 175,000,000
8 155,000,000
9 â120,000,000
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?
Bullock Gold Mine Case Study
Seth Bullock, the owner of Bullock Gold Mining, is evaluating anew gold mine in South Dakota. Dan Dority,
the companyâs geologist, has just finished his analysis of the minesite. He has estimated that the mine would
be productive for eight years, after which the gold would becompletely mined. Dan has taken an estimate of
the gold deposits to Alma Garrett, the companyâs financial officer.Alma has been asked by Seth to perform
an analysis of the new mine and present her recommendation onwhether the company should open the
new mine.
Alma has used the estimates provided by Dan to determine therevenues that could be expected from the
mine. She has also projected the expense of opening the mine andthe annual operating expenses. If the
company opens the mine, it will cost $850 million today, and itwill have a cash outflow of $120 million
nine years from today in costs associated with closing the mine andreclaiming the area surrounding it.
The expected cash flows each year from the mine are shown in thetable that follows. Bullock has a
12 percent required return on all of its gold mines.
YEAR CASH FLOW
0 â$850,000,000
1 165,000,000
2 190,000,000
3 225,000,000
4 245,000,000
5 235,000,000
6 195,000,000
7 175,000,000
8 155,000,000
9 â120,000,000
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?