Mini Case No. 3

Seth Bullock, the owner of Bullock Gold Mining, is evaluating a new gold mine in South Dakota. Dan Dority, the companys geologist, has just finished his analysis of the mine site. He has estimated that the mine would be productive for eight years, after which the gold would be completely mined. Dan has taken an estimate of the gold deposits to Alma Garrett, the companys financial officer. Alma has been asked by Seth to perform an analysis of the new mine and present her recommendation on whether the company should open the new 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 $850 million today, and it will have a cash outflow of $75 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 following table. Bullock Mining has a 12 percent required return on all of its gold mines.

Year	Cash Flow
0	$850,000,000
1	170,000,000
2	190,000,000
3	205,000,000
4	265,000,000
5	235,000,000
6	170,000,000
7	160,000,000
8	105,000,000
9	75,000,000

1. Construct a spreadsheet to calculate the payback period, internal rate of return, modified internal rate of return (assume the investment rate is the same as the borrowing rate), profitability index and net present value of the proposed mine.
2. Based on your analysis, should the company open the mine?
3. What would your opinion be if Bullock Mining evaluated the risk of spending $850 million and decided in the current environment, they required a 30% required return on all of its new gold mines? Why?
4. What is the meaning of the Required Return??