SOLVED: PART II: Valuation and Capital Budgeting BULLOCK GOLD MINING Seth Bullock, the owner of Bullock Gold Mining, is evaluating a new gold mine in South Dakota. Dan Dority, the company geologist, has just finished analyzing the mine site. He has estim (2024)

PART II: Valuation and Capital BudgetingBULLOCK GOLD MININGSeth Bullock, the owner of Bullock Gold Mining, is evaluating a new gold mine in South Dakota. Dan Dority, the company geologist, has just finished analyzing 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 his 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.Alma has used the estimates provided by Dan to determine the revenues that could be expected from the mine. She has also projected the expenses of opening the mine. The company opens the mine will cost $950 million today, with annual operating expenses. Additionally, there will be a cash outflow of $75 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 following table. Bullock Mining has a 12 percent required return on all of its gold mines:Cash FlowYear 1: $950,000,000Year 2: $190,000,000Year 3: $215,000,000Year 4: $225,000,000Year 5: $285,000,000Year 6: $275,000,000Year 7: $235,000,000Year 8: $205,000,000Year 9: $165,000,000Year 10: $75,000,000Construct a spreadsheet to calculate the payback period, internal rate of return, modified internal rate of return, profitability index, and net present value of the proposed mine. Based on your analysis, should the company open the mine?Bonus question: Most spreadsheets do not have built-in formulas to calculate the payback period. Write a VBA script that calculates the payback period for a project.

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To calculate the payback period, we need to determine when the cumulative cash flows equal or exceed the initial investment.In this case, the initial investment is $950 million. We will calculate the cumulative cash flows each year until it reaches or exceeds $9 ...
To calculate the payback period, we need to determine when the cumulative cash flows equal or exceed the initial investment.In this case, the initial investment is $950 million. We will calculate the cumulative cash flows each year until it reaches or exceeds $950 million.Year 1: $950,000,000Year 2: $950,000,000 + $190,000,000 = $1,140,000,000Year 3: $1,140,000,000 + $215,000,000 = $1,355,000,000Year 4: $1,355,000,000 + $225,000,000 = $1,580,000,000Year 5: $1,580,000,000 + $285,000,000 = $1,865,000,000Year 6: $1,865,000,000 + $275,000,000 = $2,140,000,000Year 7: $2,140,000,000 + $235,000,000 = $2,375,000,000Year 8: $2,375,000,000 + $205,000,000 = $2,580,000,000Year 9: $2,580,000,000 + $165,000,000 = $2,745,000,000Year 10: $2,745,000,000 + $75,000,000 = $2,820,000,000The payback period is between Year 8 and Year 9. To calculate the exact payback period, we can use linear interpolation:Payback period = Year 8 + (Initial investment - Cumulative cash flow at Year 8) / Cash flow at Year 9Payback period = 8 + ($950,000,000 - $2,580,000,000) / $165,000,000

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See Also

19 Frequently-asked questions (and answers) about cash flowCash Flow Analysis: Definition, Process & Examples | Tipalti

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PART II: Valuation and Capital BudgetingBULLOCK GOLD MININGSeth Bullock, the owner of Bullock Gold Mining, is evaluating a new gold mine in South Dakota. Dan Dority, the company geologist, has just finished analyzing 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 his 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.Alma has used the estimates provided by Dan to determine the revenues that could be expected from the mine. She has also projected the expenses of opening the mine. The company opens the mine will cost $950 million today, with annual operating expenses. Additionally, there will be a cash outflow of $75 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 following table. Bullock Mining has a 12 percent required return on all of its gold mines:Cash FlowYear 1: $950,000,000Year 2: $190,000,000Year 3: $215,000,000Year 4: $225,000,000Year 5: $285,000,000Year 6: $275,000,000Year 7: $235,000,000Year 8: $205,000,000Year 9: $165,000,000Year 10: $75,000,000Construct a spreadsheet to calculate the payback period, internal rate of return, modified internal rate of return, profitability index, and net present value of the proposed mine. Based on your analysis, should the company open the mine?Bonus question: Most spreadsheets do not have built-in formulas to calculate the payback period. Write a VBA script that calculates the payback period for a project.

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