MET AD 632 MINI CASE - BULLOCK GOLD MINING

BULLOCK GOLD MINING
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 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 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 $850 million today, and it will have 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. Year Cash Flow
0 ?$850,000,000
1
170,000,000
2
190,000,000
3
205,000,000
4
265,000,000
5
235,000,000
6
170,000,000
7
160,000,000
8
105,000,000
9
?75,000,000
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. 1 Based on your analysis, should the company open the mine?