Seth Bullock, the owner of Bullock Gold Mining, is evaluating a new gold mine in South Dakota. Dan Dority, the companyâs 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 companyâs 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 $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 required return of 12 percent on all of its gold mines.
Provided Table below Year Cash Flow 0 -$525,000,000 1 $74,000,000 2 $97,000,000 3 $125,000,000 4 $157,000,000 5 $185,000,000 6 $145,000,000 7 $125,000,000 8 $102,000,000 9 -$35,000,000
Required Return: 12%
1. What type of cash flow are these for the proposed mine for Bullock Gold Mining above? Conventional or non-conventional? If non-conventional, explain what issues will occur with IRR rule
2. Calculate the Payback period below. If Bullock Gold Mining payback limit is 4 years, would they accept or reject this independent project based on Payback Period rule?
Year Cash Flow 1st Calculate Cumulative Cash Flows NOTES to calculate 1st each row: 2nd Calculate Payback Period (see answer below): 0 -$525,000,000 1 $74,000,000 2 $97,000,000 3 $125,000,000 4 $157,000,000 5 $185,000,000 6 $145,000,000 7 $125,000,000 8 $102,000,000 9 -$35,000,000
3. Calculate the net present value (NPV) of the proposed mine for Bullock Gold Mining below. Would they accept or reject this independent project based on NPV rule? Note: required return is 12%.
R/I% NPV result
calc/input$ below 12%
4. Calculate the internal rate of return (IRR) of the proposed mine for Bullock Gold Mining below. Would they accept or reject this independent project based on IRR rule? (Answer carefully based on answer to question 1 above). Note: required return is 12%.
R/I% IRR result
calc/input% below 12%
5. Based on your analysis, should the company open the mine? Which of the Investment Criteria calculated above (Payback, NPV and IRR) should Bullock Gold Mining use as their decision factor, and why?
Seth Bullock, the owner of Bullock Gold Mining, is evaluating a new gold mine in South Dakota. Dan Dority, the companyâs 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 companyâs 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 $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 required return of 12 percent on all of its gold mines.
| Provided Table below | |
| Year | Cash Flow |
| 0 | -$525,000,000 |
| 1 | $74,000,000 |
| 2 | $97,000,000 |
| 3 | $125,000,000 |
| 4 | $157,000,000 |
| 5 | $185,000,000 |
| 6 | $145,000,000 |
| 7 | $125,000,000 |
| 8 | $102,000,000 |
| 9 | -$35,000,000 |
Required Return: 12%
1. What type of cash flow are these for the proposed mine for Bullock Gold Mining above? Conventional or non-conventional? If non-conventional, explain what issues will occur with IRR rule
2. Calculate the Payback period below. If Bullock Gold Mining payback limit is 4 years, would they accept or reject this independent project based on Payback Period rule?
| Year | Cash Flow | 1st Calculate Cumulative Cash Flows | NOTES to calculate 1st each row: | 2nd Calculate Payback Period (see answer below): | |||||
| 0 | -$525,000,000 | ||||||||
| 1 | $74,000,000 | ||||||||
| 2 | $97,000,000 | ||||||||
| 3 | $125,000,000 | ||||||||
| 4 | $157,000,000 | ||||||||
| 5 | $185,000,000 | ||||||||
| 6 | $145,000,000 | ||||||||
| 7 | $125,000,000 | ||||||||
| 8 | $102,000,000 | ||||||||
| 9 | -$35,000,000 | ||||||||
3. Calculate the net present value (NPV) of the proposed mine for Bullock Gold Mining below. Would they accept or reject this independent project based on NPV rule? Note: required return is 12%.
| R/I% | NPV result calc/input$ below |
| 12% |
4. Calculate the internal rate of return (IRR) of the proposed mine for Bullock Gold Mining below. Would they accept or reject this independent project based on IRR rule? (Answer carefully based on answer to question 1 above). Note: required return is 12%.
| R/I% | IRR result calc/input% below |
| 12% |
5. Based on your analysis, should the company open the mine? Which of the Investment Criteria calculated above (Payback, NPV and IRR) should Bullock Gold Mining use as their decision factor, and why?
