The Bullock Gold Mining
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• Mini-Case Study: Bullock Gold Mining
This case study, found on page 170 of your course text, deals with the process of determining future yields for a new gold mine. After reading the case study:
• Respond to the first two questions at the end of the study.
• Do not include your spreadsheet file; however, include your calculations in your response.
SAMPLE ANSWER
The Bullock Gold Mining Assignment
The estimates provided by Danto can be used by Alma to determine the revenue that is expected from the gold mine. The expense of opening the mine and the annual operating expenses is determined. Opening the mine will cost an initial capital of $750 million with a cash outflow of $75 million for 9 years. The expected cash flows from the mine for the 9 year period is represented by the table shown below.
Table 1. Summary Table
| Year | Cash flow $ (million) |
| 0 | -$750 |
| 1 | 130 |
| 2 | 180 |
| 3 | 190 |
| 4 | 245 |
| 5 | 205 |
| 6 | 155 |
| 7 | 135 |
| 8 | 95 |
| 9 | -75 |
Discussion
Payback Period
The payback period is the time taken by the investment to recoup the initial cash injected into the project. Lucrative projects have shorter payback period than the non-lucrative project that tends to have a long payback period. The calculation of the payback period of this case is summarized in the appendix A.
Net Present Value
The Net Present Value (NPV) involves the calculations of the percentage return rate, less the initial cash outlay. The NPV bigger than 1, implies that the project is lucrative and economically viable and is worth the risk (Griffin, 2009). On the other hand, the NPV value which is less than one implies that the investment is less lucrative since the returns will be less than the costs involved in the project (Cornett, Adair, & Nofsinger, 2013). In this case, the calculations of NPV are shown in appendix B.
Internal Rate of Returns (IRR)
In this case, a rate of 12% provides an IRR of $1,594,792,833. Since it can be discounted on both the higher and the lower rate, the project IRR higher than the discounting rate of returns is acceptable as shown in the Appendix.
Modified Internal Rate of Return
The modified IRR operates on the principle that the positive cash flows are reinvented at the firm’s cost of capital and the firms’ financial cost are done with the initial capital outlay (Bragg, 2009). In this regard, the modified IRR stands out as the most precise way of determining the cost and profitability of an investment as can be seen in the appendix Cullen, & Broadbent, 2012).
Conclusion
The Bullock Gold Mining case can be analyzed by the use of Payback Period, NPV, IRR, and modified IRR. From the calculations in the appendix, all the above calculations show positive results to imply that the project is worth investing in. Therefore, the Ballock Gold mine is a viable project.
References
Cornett, M., Adair, T., & Nofsinger, J. (2013).M:Finance.McGraw-Hill/Irwin; 2 edition
Bragg, S. (2009). Accounting Control Best Practices. Wiley
Cullen, J., & Broadbent, M. (2012). Managing Financial Resources (CMI Diploma in Management Series).Routledge; 3 edition
Griffin, M. (2009). MBA Fundamentals Accounting and Finance.Kaplan Publishing
http://files.constantcontact.com/46bbe3bf601/50aa6eef-1567-4562-be1e-2c3b5567dc51.pdf
Appendix A
Payback Period represents the number of years before the project pays off
Year 0= -750
Year 1=-750 130= -620
Year 2=-750 130 180= – 440
Year 3= -750 130 180 190= -250
Year 4= -750 130 180 190 245= -5
Year 4= -750 130 180 190 245 205= 200
This gold mine project will pay off between the 4th and the 5th year
5/205= 0.0244
Appendix B and 12% rate
| Initial investment | ($750,000,000) |
| 1st year’s return | $130,000,000 |
| 2nd year’s return | $180,000,000 |
| 3rd year’s return | $190,000,000 |
| 4th year’s return | $245,000,000 |
| 5th year’s return | $205,000,000 |
| 6th year’s return | $155,000,000 |
| 7th year’s return | $135,000,000 |
| 8th year’s return | $95,000,000 |
| $1,594,792,883 |
Appendix C
IRR can be calculated as follows
| Description | Data | Data |
| initial investment | ($750,000,000) | ($750,000,000) |
| 1st years returns | $130,000,000 | $130,000,000 |
| 2nd years returns | $180,000,000 | $180,000,000 |
| 3rd year returns | $190,000,000 | $190,000,000 |
| 4th year returns | $245,000,000 | $245,000,000 |
| 5th year returns | $205,000,000 | $205,000,000 |
| 6th year returns | $155,000,000 | $155,000,000 |
| 7th year returns | $135,000,000 | $135,000,000 |
| 8th year returns | $95,000,000 | $95,000,000 |
| 16% | 14% |
Appendix D
Modified IRR can be calculated as follows
| Description | data | MIRR after 3 year | |
| initial investment | ($750,000,000) | 220% | |
| 1st years returns | $130,000,000 | MIRR After 7 years | |
| 2nd years returns | $180,000,000 | 613% | |
| 3rd year returns | $190,000,000 | ||
| 4th year returns | $245,000,000 | ||
| 5th year returns | $205,000,000 | ||
| 6th year returns | $155,000,000 | ||
| 7th year returns | $135,000,000 | ||
| 8th year returns | $95,000,000 |
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