Bullock Gold Mining

Only available on StudyMode
  • Download(s) : 1194
  • Published : September 10, 2011
Open Document
Text Preview
Bullock Gold Mining
The payback period for Bullock Gold Mining in the book does not have a required time period. Usually, a company has a pre-specified length of time as a benchmark. The decision rule is to invest in projects that pay sooner or have a shorter payback period. We calculated the payback period to be 3.96 years which is less than half of the expected duration of the project. To determine 3.96 we added the Present Value of the Cash Flows until we matched the initial investment of $750,000,000. The first three years of the investment totaled $530,000,000. We used 0.96 of the fourth year’s revenues of $230,000,000 to match the remaining balance of $220,000,000. There are some problems with the Payback Method for determining whether a project is preferred. The timing of cash flows within the payback period effects the net present value of a project. The payback method does not discount the cash flows properly. The payments after the payback period are not considered. This problem has an arbitrary standard for the payback period. It is a plus that the project does payback within the eight year lifespan of the project. There are advantages to this approach. It is popular because it is easy to understand the concept and explain to others. It is quick and inexpensive to apply. A project that pays back rapidly probably has a positive 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. We desire to invest in projects with positive Net Present Value to add value to the firm. We calculated the projects Net Present Value to be $99,520,047.53. This value was calculated by the following formula: NPV = -$750,000,000 = $140,000,000/1.12 + $180,000,000/1.122 + $210,000,000/1.123 + $230,000,000/1.124 + $205,000,000/1.125 + $185,000,000/1.126 + $160,000,000/1.127 + $110,000,000/1.128 +...
tracking img