Dick Davies owns a small mining company called Davies Gold Mining. The recent rises in the gold price has made the business attractive and generated significant cash reserves for the company. Mr Davies has been evaluating an opportunity to mine a new find in Tanzania. Barry Koch, the company's senior geologist has completed a survey of the mine and has taken his results to the CFO of the company, Andy Marshall, who will analyse the predictions and form an opinion as to whether the investment is worth the risk.
Andy has used the estimates of the mine's yield combined with estimated operating costs to create a projected net income for each of the 8 years of the mine's expected life. Initial development costs will be $500 million and there will be a final expense of $80 million to clean up the mine site when the seam is exhausted. Andy's estimates are summarized in the table below. Davies Gold Mining has a 12% required return on its business activities. All figures are in millions of dollars.
|
t0
|
-500
|
t1
|
60
|
t2
|
90
|
t3
|
170
|
t4
|
230
|
|
t5
|
205
|
t6
|
140
|
t7
|
110
|
t8
|
70
|
t9
|
-80
|
1 Calculate the payback period , Internal Rate of Return and NPV of the proposed mine.
2 Based on these numbers, would you recommend that the company goes ahead?
3 How confident are you in your predictions?
4 What risks does the project face that may not be included in your calculations?