Minicase : Bullock Gold Mining

Year Cash Flow

0 $ (450,000,000)
1 $ 63,000,000
2 $ 85,000,000
3 $ 120,000,000
4 $ 145,000,000
5 $ 175,000,000
6 $ 120,000,000
7 $ 95,000,000
8 $ 75,000,000
9 $ (70,000,000)

Known :
Required Return 12%

Questions :

1. Calculate :
Payback Period
Internal Rate of Return (IRR)
Modified Internal Rate of Return (MIRR)
Net Present Value (NPV)

2. Interpret and analyze the result

CALCULATING PLAYBACK PERIOD

The mining costs $450,000,000

Year Cash Flow (CF) Cumulative

1 $ 63,000,000 $ 63,000,000
2 $ 85,000,000 $ 148,000,000
3 $ 120,000,000 $ 268,000,000
4 $ 145,000,000 $ 413,000,000 $450,000,000 is between $413,000,000-$588,000,000,
which is between year 4 and 5.
5 $ 175,000,000 $ 588,000,000
6 $ 120,000,000 $ 708,000,000
7 $ 95,000,000 $ 803,000,000
8 $ 75,000,000 $ 878,000,000
9 $ (70,000,000) $ 808,000,000

- After the first four years, the cash flow total $413,000,000
- After the fifth year, the total cash flow is $588,000,000
- So the mining pays back sometime between the end of year 4 and year 5.
- Because the accumulated cash flows for the first four years are $413,000,000, we need to recover $37,000,000 in the fifth
- The fifth year cash flow is $175,000,000, so we will have to wait $37,000,000/175,000,000 = .21 year to do this
- The payback period is thus 4 year + .21 year = 4.21 year or about 4 years and two a half months
00-$588,000,000,

over $37,000,000 in the fifth year

1 year to do this
hs
CALCULATING IRR

Year Cash Flow

0 $ (450,000,000)
1 $ 63,000,000
2 $ 85,000,000
3 $ 120,000,000
4 $ 145,000,000
5 $ 175,000,000
6 $ 120,000,000
7 $ 95,000,000
8 $ 75,000,000
9 $ (70,000,000)

Calculation

IRR 15.67%

- The formula entered in cell B17 is =IRR(B4:C13).

- Notice that the year 0 cash flow has a negative sign representing the initial cost of the project
- The IRR result is 15.67%, so the discount rate that makes the NPV of an investment zero in this gold mining project is 15.6
 ect
n this gold mining project is 15.67%
CALCULATING MIRR

The required return 12%

Year Cash Flow

0 $ (450,000,000)
1 $ 63,000,000
2 $ 85,000,000
3 $ 120,000,000
4 $ 145,000,000
5 $ 175,000,000
6 $ 120,000,000
7 $ 95,000,000
8 $ 75,000,000
9 $ (70,000,000)

Calculation

MIRR 13.48%

- The formula entered in cell B17 is =MIRR(B4:C13;B3;B3).

- The MIRR result is 13.48%. MIRR is IRR with considering both the investment costs and the interest received from reinves
d the interest received from reinvesting cash.
CALCULATING NPV

The required return 12%

Year Cash Flow

0 $ (450,000,000)
1 $ 63,000,000
2 $ 85,000,000
3 $ 120,000,000
4 $ 145,000,000
5 $ 175,000,000
6 $ 120,000,000
7 $ 95,000,000
8 $ 75,000,000
9 $ (70,000,000)

Calculation

First Method
Using manual calculation

Year (n) Cash Flow Required Return (k) (1+k)^n

(1) (2) (3) (4)
0 $ (450,000,000) 12% 1.00
1 $ 63,000,000 12% 1.12
2 $ 85,000,000 12% 1.25
3 $ 120,000,000 12% 1.40
4 $ 145,000,000 12% 1.57
5 $ 175,000,000 12% 1.76
6 $ 120,000,000 12% 1.97
7 $ 95,000,000 12% 2.21
8 $ 75,000,000 12% 2.48
9 $ (70,000,000) 12% 2.77
NPV

Second Method
Using Excel Formula

NPV $ 59,692,381

The result of NPV is $59,692,381. The value of NPV is positive. It means if the company open that gold mining, they get goo
 Cash Flow PV ((2)/(4))
(5)
$ (450,000,000.00)
$ 56,250,000.00
$ 67,761,479.59
$ 85,413,629.74
$ 92,150,121.37
$ 99,299,699.75
$ 60,795,734.54
$ 42,973,175.46
$ 30,291,242.10
$ (25,242,701.75)
$ 59,692,380.80

the company open that gold mining, they get good investment