Calculate the payback period-internal rate of return

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Reference no: EM131417239

Mary Smith, the owner of Smith gold Mining, is evaluating a new gold mine in North Dakota.  Maria, the company's geologist, has just finished his analysis of the mine site.  She has estimated that the mine would be productive for eight years, after which the gold would be completely mined.  Maria has taken an estimate of the gold deposits to Bob, the company's financial officer.  Bob has been asked by Maria to perform an analysis of the new mine and present her recommendation on whether the company should open the new mine.

Bob has used the estimates provided by Maria 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 $800 million today, and it will have a cash outflow of $190 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. Smith  gold Mining has a 12 percent required return on all of its gold mines.

Year

Cash Flow

1

170,000,000

2

180,000,000

3

280,000,000

4

360,000,000

5

390,000,000

6

260,000,000

7

190,000,000

8

120,000,000

1. Calculate the payback period, internal rate of return and net present value of the proposed mine. Construct a spreadsheet for your calculations.

2. Based on your analysis, should the company open the mine?

Reference no: EM131417239

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