Case study Bullock Gold Mining

Casestudy: Bullock Gold Mining

CaseStudy: Bullock Gold Mining

Question1

Calculationof Payback Period, IRR, MIRR and the NPV of the proposed gold mine

Solution 1:

Year

Cash Flows

Discounted Cash Flows

PV

Discounted PV

0

$

(750,000,000)

(750,000,000)

(750,000,000)

(750,000,000)

1

$

130,000,000

(620,000,000)

116,071,429

(633,928,571)

2

$

180,000,000

(440,000,000)

143,494,898

(490,433,673)

3

$

190,000,000

(250,000,000)

135,238,247

(355,195,426)

4

$

245,000,000

(5,000,000)

155,701,929

(199,493,497)

5

$

205,000,000

200,000,000

116,322,505

(83,170,992)

6

$

155,000,000

78,527,824

(4,643,168)

7

$

135,000,000

61,067,144

56,423,976

8

$

95,000,000

38,368,907

9

$

(75,000,000)

(27,045,752)

Payback Period

4.02

Discounted Payback Period

6.08

NPV

67,747,131

67,747,131

&nbsp

&nbsp

&nbsp

Cost of Capital

12%

&nbsp

&nbsp

&nbsp

&nbsp

IRR

15%

&nbsp

&nbsp

&nbsp

&nbsp

MIRR

13%

&nbsp

Question2

Basingon the analysis, Bullock Gold Mining should proceed and open themine. According to the calculations, the new gold mine has a positiveNet Present Value of $67,747,131 which enhance project acceptance bythe company (Frezatti,2011).NPV is basically considered to be one of the capital budgetingmethods that are often utilized by both the new and the existinginvestors so as to gauge the project suitability done by comparingthe expected discounted inflows and cash flows. For mutuality,exclusive projects, a potential investor often selects the projectsthat have a higher Net Present Value as this indicates that theproject is viable. In this aspect, for a single project, a potentialinvestor will only accept the definite project if it has a positiveNPV.

Advantagesof NPV

  • NPV is relevant to the company since it enhances the time value of cash flows.

  • Net Present Value helps the business in maximizing the company’s value because risks and projects profitability are given a high concern.

Disadvantagesof NPV

  • Net Present Value is often a difficult method to use.

  • Net Present Value cannot provide an accurate decision if the investment funds of mutuality exclusive investments are not equal.

InternalRate of Return (IRR)

IRRis considered to be the discounting rate that often produces zero (0)NPV. IRR is often used by businesses to evaluate the attractivenessof its projects and its investments (Zimmerman,2011).Bullock Gold Mine should undertake the project since its IRR (15%) ismore than the cost of capital (12%).

Advantagesof IRR

  • IRR often considered the time value of money in assessing an investment which is a problem in accounting rate of returns.

  • IRR is very simple to be interpreted after being calculated since it is usually easy to envisage for managers and that is the reason for preference.

Disadvantagesof IRR

  • Internal Rate of Return often disregards the economies of scale. It disregards the definite dollar value of benefits.

  • IRR disregards the future costs of projects. The approach only apprehends itself with the estimated cash flows provided by a capital injection and disregards the probable future cost that might affect profits.

PaybackPeriod

PaybackPeriod is considered to be the period in which the investment initialcash flows are anticipated to be recovered from the inflows of cashthat are produced by the project (Zimmerman,2011).The project should be accepted since it has a shorter payback periodof 4.02 years.

Advantagesof Payback Period

  • It is often simple and easy to calculate

  • For firms that are facing problems of liquidity, Payback Period offers an excellent ranking of investment that would return invested money early.

Limitationsof Payback Period

  • PB does not consider the time value of money

  • It does not consider the cash flows that arise after the payback time.

MIRR

MIRRis considered to be a financial evaluation of project attractiveness.In business, it is often used to ranks alternative investment ofequal sizes (Maher,Stickney, &amp Weil, 2012).Bullock Gold Mine should undertake the project since its MIRR (13%)is more than the cost of capital (12%)

Advantagesof MIRR

  • It helps in the measurement of the investment sensitivity towards variations in the cost of capital (Saremi, 2013).

  • It overcomes two major weakness of IRR that comprises of the exclusion of many IRR.

Disadvantagesof MIRR

  • MIRR is often hard to understand for individuals from non-financial backgrounds.

Reference

Frezatti,F. A. (2011). Does management accounting play role in planningprocess? Journalof Business Research, 64(3),242-249.

Maher,M. W., Stickney, C. P., &amp Weil, R. L. (2012).&nbspManagerialaccounting: An introduction to

concepts,methods and uses.Cengage Learning.

Saremi,H. &amp. (2013). Roleof Management Accounting in Managerial the Decision Making ofEnterprises.

Zimmerman,J. L.-Z. (2011). Accounting for decision making and control. Issuesin Accounting Education.