Question

Seth Bullock, the owner of Bullock Gold Mining, is evaluating a new gold mine in South Dakota. Dan Dority, the company’s geologist, has just finished his analysis of the mine site. He has estimated that the mine would be productive for eight years, after which the gold would be completely mined. Dan has taken an estimate of the gold deposits to Alma Garrett, the company’s financial officer.

Alma has been asked by Seth to perform an analysis of the new mine and present her recommendation on whether the company should open the new mine. Alma has used the estimates provided by Dan 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 $525 million today, and it will have a cash outflow of $35 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.

Bullock Mining has a required return of 12 percent on all of its gold mines.

Provided Table below
Year	Cash Flow
0	-$525,000,000
1	$74,000,000
2	$97,000,000
3	$125,000,000
4	$157,000,000
5	$185,000,000
6	$145,000,000
7	$125,000,000
8	$102,000,000
9	-$35,000,000

1. Please calculate the internal rate of return and show all work.

Answer 1

Q1:

IRR can be only found by trial and error or through excel using IRR formula; The calculation is attached below;

IRR is the internal rate at which the NPV of the project becomes zero;

From excel =IRR() formula has been used as below and found the IRR value directly.

For counter checking use this IRR value (15.52379%) to calculate the NPV value of the project ; the NPV will be close to zero with a small margin of error.