Bullock Gold Mining

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. Please refer to the computation in the excel file: C:\Documents Settings\heniper\My Documents\eskwela\rackets\january 27 2012.xlsx and

I provided two assumptions since the amount written in the problem (P80M) as compared with what is in the table (P95M) is not the same. I am referring to the cash out on the end of the ninth year. Under the two assumptions, final answers will be as follows: Assumption 1 A. Payback Period B. Internal Rate of Return C. Modified Internal Rate of Return D. Net Present Value 3.47 years 23.73% 16.21% $ 171,141,294.31 Assumption 2 3.47 years 23.93% 16.37% $176,550,444.68

2. Based on your analysis, should the company open the mine? Using the payback period method, it can be said that project is a good one since the company will be able to recover its investment in less than four years. However, it must be noted that one of the drawbacks of using this method is that it ignores the time value of money and any cash outflows that will happen after the payback period. On another note, since the internal rate of return and modified internal rate of return is greater than the required return of capital for the mining investment, it will mean the company will be earning more than what it needs. This can also be confirmed by the positive net present value arrived at during the computations. Overall, I suggest that the company open the mine.