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Bullock Gold Mining

Corporate Finance Case Study

Uun Ainurrofiq 1111200141

Yoong Khai Hung 1111200139

Khatereh Azarnoor 1101600315

Aliakbar Bahrpeyma1091200261

Jevgenijs Lesevs 1111200131

Shahin Firouztash 1111200070

Case Overview

Seth Bullock(Owner)

Dan Dority (Geologist)

Alma Garrett (CFO)

Hi fellas..we plan to work on a new Gold Mine in South Dakota !!

Not Bad.. based on my estimation,that site would be productive for eight year sir..

Alright gentleman, Chill out.. I’ll do the financial analysis to help you making a rational decision

Alma’s Cash flow Estimation

Year Cash Flow

0 $ (400,000,000.00)

1 $ 85,000,000.00

2 $ 90,000,000.00

3 $ 140,000,000.00

4 $ 180,000,000.00

5 $ 195,000,000.00

6 $ 130,000,000.00

7 $ 95,000,000.00

8 $ 60,000,000.00

9 $ (95,000,000.00)

0 1 2 3 4 5 6 7 8 9

$(500,000,000.00)

$(400,000,000.00)

$(300,000,000.00)

$(200,000,000.00)

$(100,000,000.00)

$-

$100,000,000.00

$200,000,000.00

$300,000,000.00 Initial Investment

Reclamation Cost

Cash Inflow /Revenue Stream

Our company required rate of return is 12%

Bonus Question (VBA Script)

Questions of The Case

Payback Period

IRR & MIRR

Financial Decision

NPV (Net Present Value)

Payback Period (Spreadsheet)

*Formula Payback Period in C15 =-C7/(B8)+3

*Formula Disc Payback Period in E15 =-E8/(D9)+4

Discounted Payback Period

Year Initial Investment Discounted Cashflow 0 -$400,000,000 1 $85,000,000 / (1.12)1 = $75,892,857 2 $90,000,000 / (1.12)2 = $71,747,449 3 $140,000,000 / (1.12)3 = $99,649,235 4 $180,000,000 / (1.12)4 = $114,393,254 5 $195,000,000 / (1.12)5 = $110,648,237 6 $130,000,000 / (1.12)6 = $65,862,046 7 $95,000,000 / (1.12)7 = $42,973,175 8 $60,000,000 / (1.12)8 = $24,232,994 9 -$95,000,000 / (1.12)9 = -$34,257,952

The Concept of NPV

The Net Present Value of the project compares how much the project cost with how much it brings in terms of today’s dollar value. We use a procedure called the discounted cash flow (DCF) valuation. The NPV of the project can be calculated by the following formula:

NPV = PV0 + PV1 + PV2 + PV3 …… + PVn

PV =

• t - the time of the cash flow • i - the discount rate (the rate of return)• C - the net cash flow (the amount of cash, inflow minus outflow)

NPV (Manual Calculation)

Year Cash Flow Calculation Present Value

0 $ (400,000,000.00) $ (400,000,000)

1 $ 85,000,000.00 85,000,000 / (1.12)1

$ 75,892,857

2 $ 90,000,000.00 90,000,000 / (1.12)2

$ 71,747,449

3 $ 140,000,000.00 140,000,000 / (1.12)3

$ 99,649,235

4 $ 180,000,000.00 180,000,000 / (1.12)4

$ 114,393,254

5 $ 195,000,000.00 195,000,000 / (1.12)5

$ 110,648,237

6 $ 130,000,000.00 130,000,000 / (1.12)6

$ 65,862,046

7 $ 95,000,000.00 95,000,000 / (1.12)7

$ 42,973,175

8 $ 60,000,000.00 60,000,000 / (1.12)8

$ 24,232,994

9 $ (95,000,000.00)-95,000,000 / (1.12)9

$ (34,257,952)

Net Present Value >> $ 171,141,294

NPV

NPV formula in Ms Excel = NPV (rate, values)

NPV formula in after correction = NPV (rate, values) + initial cost

IRR

IRR formula in Ms Excel = IRR (values)

MIRR formula in Ms Excel = MIRR (values, finance rate, reinvest rate )

IRR

IRR = 24%

13,777,690/x = 171,141,294.31/13-x x = 0.98

MIRR

Year cash flow future value factor at 15% terminal value $1 85 000 000 (1.12)^8 210 465 8702 90 000 000 (1.12)^7 198 961 3273 140 000 000 (1.12)^6 276 335 1764 180 000000 (1.12)^5 317 221 5035 195 000 000 (1.12)^4 306 836 2756 130 000 000 (1.12)^3 182 640 6407 95 000 000 (1.12)^2 119 168 0008 60 000 000 (1.12)^1 67 200 000 1678828791

DCF0= 400 000 000/(1.12)^0 = 400 000 000DCF9= 95 000 000/(1.12)^9 = 34 257 952.37 434 257 952.37

MIRR

MIRR = - 1

MIRR = 16.21 %

MIRR = = 0.2587

MIRR = 16.21 %

In PV table 0.2587 ► 16.21%

other method

Financial Decision

Decision

INVEST !!!

MIRR > R

16.21 %

NPV (+)

$ 171,141,294.31

1.The Payback Period is within the investment lifespan: Good

2.The Net Present Value has a Positive Value: Good

3.The MIRR is greater than the current cost of capital Good

Discounted Payback Period 4.35 ( < 8 Years)

NPV vs IRR

NPV or IRR ??

NPV vs IRR

Mutually Exclusive Projects

NPV moreIRR less

NPV lessIRR more

How to decide ???

NPV vs IRR

Find value of “i”Project A-1000 000+350 000/(1+i)^1 +400 000/(1+i)^2 +500 000/(1+i)^3 +650 000/(1+i)^4 +700 000/(1+i)^5

Project B-800 000+ 600 000/(1+i)^1 +400 000/(1+i)^2 +300 000/(1+i)^3 +200 000/(1+i)^4 +200 000/(1+i)^5

i = 29.165% crossover point

-100 000+ 350 000/(1+29.165)^1 + … =170 981NPV crossover point = 170 981

NPV & IRR

903,021

562,214

36% 42%

Crossover point

29.165%

170,981

NPV

Project A

Project B

Discount Rate

Mutually Exclusive Projects

Bonus Question

Seth Bullock(Owner)

Most spreadsheets do not have built-in formula to calculate the payback period.

Write a VBA script that calculates the payback period for a project !!

Bonus Question

Payback period = Amount invested ⁄ Expected annual cash inflow

*When the periodic cash inflows are unequal, “Net cash inflows”have to be summed up until the amount invested in recovered.

VBA Script

Function PAYBACK(invest, finflow) Dim x As Double, v As Double Dim c As Integer, i As Integer x = Abs(invest) i = 1 c = finflow.Count Do x = x - v v = finflow.Cells(i).Value If x = v Then PAYBACK = i Exit Function ElseIf x < v Then P = i - 1 Z = x / v PAYBACK = P + Z Exit Function End If i = i + 1 Loop Until i > c PAYBACK = "no payback" End Function

invest and finflow get the values of Investment and Cash inflow from Excel

Dim allocates space in the memory for created variable

Abs() function gets the absolute value of invest variable i is to count the number of payback years

finflow.Count counts the number Cash inflowsEnter a loop that calculates the payback period

finflow.Cell get the amount of cash inflow in each cell in

the excel file, the value will be assign to variable v

VBA Script (cont’d)

Function PAYBACK(invest, finflow) Dim x As Double, v As Double Dim c As Integer, i As Integer x = Abs(invest) i = 1 c = finflow.Count Do x = x - v v = finflow.Cells(i).Value If x = v Then PAYBACK = i Exit Function ElseIf x < v Then P = i - 1 Z = x / v PAYBACK = P + Z Exit Function End If i = i + 1 Loop Until i > c PAYBACK = "no payback" End Function

if the invested value is equal to cash inflow value then i = 1 will be returned as the number of payback years

if the invested amount is less than the cash inflows, then Formula 1 will be performed, this and the result will be returned as the

number payback years

this loop makes sure that all the Cash inflows have been considered and summed up in the excel file.

If the amount invested is more than the Cash inflows (x > v) then there will be no payback and the message will be returned to the

user

Company Cash Flow

Year Cash Flow

0 - $400,000,000

1 85,000,000

2 90,000,000

3 140,000,000

4 180,000,000

5 195,000,000

6 130,000,000

7 95,000,000

8 60,000,000

9 -95,000,000

The total investment and cash flows are as follow:

VBA Running in Ms Excel

Seth Bullock(Owner)

Dan Dority (Geologist)

Alma Garrett (CFO)

Thank You

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Back-Up Slides

Payback Period

Year Cash outflow Cash Inflow Payback 0 -$400,000,000 -$400,000,000 1 $85,000,000 -$315,000,000 2 $90,000,000 -$225,000,000 3 $140,000,000 -$85,000,000 4 $180,000,000 5 $195,000,000 6 $130,000,000 7 $95,000,000 8 $60,000,000 9 -$95,000,000

85,000,000 / 180,000,000 = 0.47

Payback period = 3.47 years

Discounted Payback Period

Year Discounted Cash outflow Discounted Cash Inflow Payback 0 -$400,000,000 -$400,000,000 1 $75,892,857 -$324,107,143 2 $71,747,449 -$252,359,694 3 $99,649,235 -$152,710,459 4 $114,393,254 -$38,317,205 5 $110,648,237 6 $65,862,046 7 $42,973,175 8 $24,232,994 9 -$34,257,952

38,317,205 / 110,648,237 = 0.35

Payback period = 4.35 years