Kenney Gold Mining is evaluating a new gold mine in Montana. The company has estimated that the mine would be productive for eight years. Jim Cochran, the companys financial officer, has been asked to perform an analysis of the new mine and present his recommendation on whether the company should open the new mine. Jim has used the estimates provided by the companys geologist to determine the revenues that could be expected from the mine. He has also projected the expense of opening the mine and the annual operating expenses. If the company opens the mine, it will cost $722 million today. The expected cash flows each year from the mine are shown in the following table. Kenney Gold Mining has a 11 percent required return on all of its gold mines.

Year

0 1 2 3 4 5 6 7 8

Questions

Cash flows -$722,000,000 $80,000,000 $120,000,000 $162,000,000 $221,000,000 $210,000,000 $154,000,000 $108,000,000 $86,000,000

1. What is the payback period of the project? If the cut-off payback period is 4 years, should we accept or reject the project? Why?

2. What is the profitability index of the project? Should the project be accepted? Why?

3. What is the internal rate of return (IRR) of the project? Should the project be accepted? Why?

4. What is the net present value (NPV) of the project? Should the project be accepted?

Show Excel Inputs