Bullock Gold Mining is evaluating a new gold mine in South Dakota. All of the analysis has been done and the CFO has forecast some of the relevant cash flow information. If BGM opens the mine, it will cost $635 million today (Time 0) and it will have a cash outflow nine years from today (Time 9) of $45 million in costs related to closing the mine and reclaiming the area around. Of the initial costs, BGM will depreciate $500 million over 8 years using straight line method. Expected earnings before taxes for the eight years of operation are shown below. BGM has a required rate of return for all of its gold mines of 12%. Earnings before taxes (in $1,000s): 0123456789 37,857.1460,714.2996,428.57157,857.1203,571.4132,142.9117,857.185,000.00 Find the relevant cash flows for each of the relevant periods (Time 0 – Time 9). Calculate the NPV, IRR and Payback Period for the cash flows and indicate whether BGM should pursue the mining project or not.Operating cash flows for Time 1-8 should include:Earnings before taxesTaxes (30%)Net IncomeDepreciationFree Cash flows

Net present value is the excess of present value of cash inflows over cash outflows.

Answered: Bullock Gold Mining is evaluating a new…

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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Bullock Gold Mining is evaluating a new gold mine in South Dakota. All of the analysis has been done and the CFO has forecast some of the relevant cash flow information. If BGM opens the mine, it will cost $635 million today (Time 0) and it will have a cash outflow nine years from today (Time 9) of $45 million in costs related to closing the mine and reclaiming the area around. Of the initial costs, BGM will depreciate $500 million over 8 years using straight line method. Expected earnings before taxes for the eight years of operation are shown below. BGM has a required rate of return for all of its gold mines of 12%.

Earnings before taxes (in $1,000s):

0	1	2	3	4	5	6	7	8	9
	37,857.14	60,714.29	96,428.57	157,857.1	203,571.4	132,142.9	117,857.1	85,000.00

Find the relevant cash flows for each of the relevant periods (Time 0 – Time 9). Calculate the NPV, IRR and Payback Period for the cash flows and indicate whether BGM should pursue the mining project or not.

Operating cash flows for Time 1-8 should include:

Earnings before taxes

Taxes (30%)

Net Income

Depreciation

Free Cash flows

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