Dr. Ron Patterson, the owner of Chadron Gold Mining, is evaluating a new gold mine in Colorado. Dr. Tawny Tibbits, the company's geologist, has just finished her 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. Tawny has taken an estimate of the gold deposits to Dr. Pil Joon Kim, the company's financial officer. Pil Joon has been asked by Ron to perform an analysis of the new mine and present his recommendation on whether the company should open the new mine. Year Cash Flow 0 1 2 -$650,000,000 80,000,000 121,000,000 3 162,000,000 4 221,000,000 5 210,000,000 6 154,000,000 7 108,000,000 8 9 86,000,000 -72,000,000 Pil Joon has used the estimates provided by Tawny 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 $650 million today, and it will have a cash outflow $72 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 above. Chadron Gold Mining has a 12 percent required return on all of its gold mines. Questions: 1. Show the detailed calculation process and results for the payback method, internal rate of return, modified internal rate of return and net present value of the proposed mine. 2. Based on your analysis, should the company open the mine? Please explain in detail.
Dr. Ron Patterson, the owner of Chadron Gold Mining, is evaluating a new gold mine in Colorado. Dr. Tawny Tibbits, the company's geologist, has just finished her 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. Tawny has taken an estimate of the gold deposits to Dr. Pil Joon Kim, the company's financial officer. Pil Joon has been asked by Ron to perform an analysis of the new mine and present his recommendation on whether the company should open the new mine. Year Cash Flow 0 1 2 -$650,000,000 80,000,000 121,000,000 3 162,000,000 4 221,000,000 5 210,000,000 6 154,000,000 7 108,000,000 8 9 86,000,000 -72,000,000 Pil Joon has used the estimates provided by Tawny 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 $650 million today, and it will have a cash outflow $72 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 above. Chadron Gold Mining has a 12 percent required return on all of its gold mines. Questions: 1. Show the detailed calculation process and results for the payback method, internal rate of return, modified internal rate of return and net present value of the proposed mine. 2. Based on your analysis, should the company open the mine? Please explain in detail.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Dr. Ron Patterson, the owner of Chadron Gold Mining, is evaluating a new gold mine in Colorado. Dr. Tawny Tibbits, the company's geologist, has just finished
her 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. Tawny has
taken an estimate of the gold deposits to Dr. Pil Joon Kim, the company's financial officer. Pil Joon has been asked by Ron to perform an analysis of the new
mine and present his recommendation on whether the company should open the new mine.
Year
Cash Flow
0
1
2
-$650,000,000
80,000,000
121,000,000
3
162,000,000
4
221,000,000
5
210,000,000
6
154,000,000
7
108,000,000
8
9
86,000,000
-72,000,000
Pil Joon has used the estimates provided by Tawny 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 $650 million today, and it will have a cash outflow $72 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 above. Chadron Gold Mining has a 12 percent required return on all of its gold mines.
Questions:
1. Show the detailed calculation process and results for the payback method, internal rate of return, modified internal rate of return and net present value of
the proposed mine.
2. Based on your analysis, should the company open the mine? Please explain in detail.
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