The Bullock Gold Mine Case
Basic capital budgeting methods can be used to determine the viability of a project. A new project is proposed for the owner of the Bullock Gold Mine. Basic capital budgeting methods are presented here and used in the decision making process. The first two questions found on page 170 of the course text are answered. The calculations are made and presented after using Excel spreadsheets, presented in the appendices.
Spreadsheet Application for Investment Rules
A spreadsheet can be constructed to calculate the payback period, internal rate of return, modified rate of return, and the net present value for the cash flows given over a nine year period as presented in Appendix A (Ross, Westerfield, & Jaffe, 2013). Net present value (NPV) in capital budgeting aids in the decision of whether to accept or reject a project since it gives the value of the project at the present date. The major consideration is that value of the dollar at a future date is less than at the present date. With the excel spreadsheet as shown in Appendix B, the NPV for the proposed Bullock mine is NPV (rate, values) + initial cost = $67,747,130.88
The payback period is the period it would take the firm to recover its initial investment. From Appendix B, after year 4 there is only $5, 000, 000, 00 to be recovered. The payback period will be into the 5th year by a small fraction of $5,000,000/155,000,000 = 0.03yrs. The payback period is 4 years + 0.03 years = 4.03 years (Appendix B).
The internal rate of return is an alternative to the payback period. With the excel sheet, the formula is =IRR(values) and the values is 14.72% for the proposed Bullock Gold Mine (Appendix B). The modified internal rate of return determines the NPV and eliminates the problem of multiple IRR at the point where the cash flow has only a single change in sign remaining. With the excel sheet, it is obtained using MIRR(values, finance rate, reinvestment rate) = 13.05% for the mine (Appendix...