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 $745 million today, and it will have a cash outflow of $55 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 table. Bullock Mining has a required return of 12 percent on all of its gold mines. Year 0 Cash Flow -$745,000,000 127,000,000 1 2 135,000,000 3 145,000,000 4 185,000,000 5 225,000,000 6 165,000,000 7 155,000,000 8 134,000,000 9 - 55,000,000 QUESTIONS 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. 2. Based on your analysis, should the company open the 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 $745 million today, and it will have a cash outflow of $55 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 table. Bullock Mining has a required return of 12 percent on all of its gold mines. Year 0 Cash Flow -$745,000,000 127,000,000 1 2 135,000,000 3 145,000,000 4 185,000,000 5 225,000,000 6 165,000,000 7 155,000,000 8 134,000,000 9 - 55,000,000 QUESTIONS 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. 2. Based on your analysis, should the company open the mine?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 12P

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