Mr. Tim Awesome, the owner of Awesome Mining, Inc., is evaluating a new gold mine in Colorado. Jim Coal, 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. Jim has taken an estimate of the gold deposits to Jill Books, the companys financial officer. Jill has been asked by Tim to perform an analysis of the new mine and present her recommendation on whether the company should open the new mine.

Jill has used the estimates provided by Jim 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 $500 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. Awesome Mining has a 12 percent required return on all its gold mines.

Table 1 Year Cash Flow

0 -500,000,000

1 60,000,000

2 90,000,000

3 170,000,000

4 230,000,000

5 205,000,000

6 140,000,000

7 110,000,000

8 70,000,000

9 -80,000,000

Questions

1) Calculate the payback period, profitability index, internal rate of return, and the net present value. (Please Show Work)

2) Based on your analysis, should the company open the mine? If not, in your opinion, under what terms would it be advantageous?