Corporate Finance Case Study : Bullock Gold Mining
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Transcript of Corporate Finance Case Study : Bullock Gold Mining
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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