Dick Davies, the owner of Davies Gold Mining, is evaluating a new gold mine in Tanzania.
Barry Koch, the company’s geologist, has just finished his analysis of the mine site. He has estimated that the mine would be productive for 8 years, after which the gold would be completely mined. Barry has taken an estimate of the gold deposits to Andy Marshall, the company’s financial officer. Andy has been asked by Dick to perform an analysis of the new mine and present his recommendation on whether the company should open the new mine.
Andy has used the estimates provided by Barry to determine the revenues that could be expected from the mine. He has also projected the expense of opening the mine and the annual operating expenses. If the company opens the mine, it will cost £500 million today, and it will have a cash outflow of £80 million 9 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 following table. Davies Gold Mining has a 12 per cent required return on all of its gold mines.

1. Construct a spreadsheet to calculate the payback period, internal rate of return, modified internal rate of return, and net present value of the proposed mine.
2. Based on your analysis, should the company open the mine?
3. Bonus question: Most spreadsheets do not have a built-in formula to calculate the payback period. Write a VBA script that calculates the payback period for a project.

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Year 0 1 2 3 4 5 6 7 8 9 Cash Flow () -500,000,000 60,000,000 90,000,000 170,000,000 230,000,000 205,000,000 140,000,000 110,000,000 70,000,000 -80,000,000