Case Study

Germanium and Gallium Mines

Canada World Mining Inc. (CWMI) is evaluating to invest either in a new Germanium or Gallium mine.CWMI's geologist has just finished his analysis of the mine site. He has estimated that both mines would be productive for 8-9 years, after which the Germanium or Gallium would be completely mined.

John Walker, CEO, has requested Mary Rose, CFO, to perform an analysis of both new mines and present her recommendations on whether the company should invest in either the Germanium mine or the Gallium mine.

Mary has used the estimates provided by John to determine the revenues that could be expected from the mines. She has also projected the expense of opening the mines and the annual operating expenses.The expected cash flows each year from the mine are shown in the table above. CWMI has a 12% required return on all projects.

Year	Cash Flow for Germanium Mine ($ Million)	Cash Flow for Gallium Mine ($ Million)
0	-450	-635
1	63	-110
2	85	-50
3	120	765
4	145	515
5	175	330
6	120	255
7	95	215
8	86	190
9	-70	10
10	-	-325

Required:

1. Calculate the payback period, discounted payback period, net present value, internal rate of return, modified internal rate of return and also any additional capital budgeting techniques that you think necessary.

1. Compare and contrast the rationales and different assumptions made in different investment appraisal methods. Which method you think is closest to reality? Explain.

1. In recent years, interest rate has been going up persistently in the economy. Describe and calculate (if necessary) how each method reacts to increasing cost of capital?Explain.

Recommend whether CWMI should invest in the Germanium or the Gallium mine.