The ABC company is examining the possible opening of a mine in British Columbia. The company's geologist has just completed his analysis of the site where the mine could be built. He estimated that the mine would be productive for a period of 8 years, after which it would be closed. The financial director used the estimates provided by the geologist to determine the revenue that could be earned from the mine.

He also projected the various costs that the company would face, namely the costs of opening the mine and the annual expenses.
If the company decides to open this new mine, it would cost it $500 million today and it would have to spend $80 million in 9 years to close it.

The cash flows for years 1 to 8 are 60 million, 90 million, 170 million, 230 million, 205 million, 140 million, 110 million and 70 million, respectively. The company requires a rate of return of 12% for all the mines it owns.

 

CASE STUDY QUESTIONS

1. After defining the average accounting rate of return, net present value, payback period, internal rate of return and profitability index, give two advantages and two disadvantages of each of these methods. 

2. Calculate the payback period, internal rate of return, net present value and profitability index for the British Columbia mine opening project. 

3. Based on the results of your analysis, should the company open the mine?

Answer rating: 100% (QA)

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