1. Seth Bullock, the owner of Bullock Gold Mining, is evaluating a new gold mine in South Dakota. Dan Dority, the company's geologist, has just finished his analysis of the mine site. He has estimated that the mine would be productive for eight years, during which the gold would be completely mined. Dan has taken an estimate of the gold deposits to Alma Garrett, the company's financial officer. Alma has been asked by Seth to perform an analysis of the new mine and present her recommendation on whether the company should open the new mine.

Year Cash Flow
0 -$650,000,000
1 $80,000,000
2 $121,000,000
3 $162,000,000
4 $221,000,000
5 $210,000,000
6 $154,000,000
7 $108,000,000
8 $86,000,000
9 -$72,000,000

Alma has used the estimates provided by Dan to determine the revenues that could be expected from the mine. She has also projected the expense of opening the mine and the annual operating expenses. If the company opens the mine, it will cost $650 million today, and it will have a cash outflow of $72 million nine 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 table on this page. Bullock Mining has a 12 percent 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.

2. McKeekin Corp. has a project with the following cash flows:

Year Cash Flow
0 $20,000
1 -$26,000
2 $13,000

a. What is the IRR of this project?
b. Explain what is happening here.

3. Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president is Shelly Couts, who inherited the company. The company originally repaired radios and other household appliances when it was founded over 70 years ago. Over the years, the company has expanded, and it is now a reputable manufacturer of various specialty electronic items. The company hired Jay McCanless, a recent MBA graduate, in its finance department. One of the major revenue-producing items manufactured by Conch Republic is a smart phone. Conch Republic currently has one smart phone model on the market and sales have been excellent. The smart phone is a unique item in that it comes in a variety of tropical colors and is preprogrammed to play Jimmy Buffett music. However, as with any electronic item, technology changes rapidly, and the current smart phone has limited features in comparison with newer models.

Conch Republic spent $750,000 to develop a prototype for a new smart phone that has all the features of the existing one but adds new features such as wifi tethering. The company has spent a further $200,000 for a marketing study to determine the expected sales figures for the new smart phone. Conch Republic can manufacture the new smart phone for $205 each in variable costs. Fixed costs for the operation are estimated to run $5.1 million per year. The estimated sales volume is 64,000, 106,000, 87,000, 78,000, and 54,000 per year for the next five years, respectively. The unit price of the new smart phone will be $485. The necessary equipment can be purchased for $34.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $5.5 million. Net working capital for the smart phones will be 20 percent of sales and will occur with the timing of the cash flows for the year (i.e., there is no initial out-lay for NWC). Changes in NWC will thus first occur in Year 1 with the first year's sales. Conch Republic has a 35 percent corporate tax rate and a required return of 12 percent. Shelly has asked Jay to prepare a report that answers the following questions:

a. What is the payback period of the project?
b. What is the profitability index of the project?
c. What is the IRR of the project?
d. What is the NPV of the project?
e. How sensitive is the NPV to changes in the price of the new smart phone?
f. How sensitive is the NPV to changes in the quantity sold?
g. Should Conch Republic produce the new smart phone?
h. Suppose Conch Republic loses sales on other models because of the introduction of the new model. How would this affect your analysis?
i. Given the choice, would a firm prefer to use MACRS depreciation or straight-line depreciation? Why? Provide examples to support your case.

4. Project Evaluation. Aguilera Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:
Year Unit Sales

1 $87,500
2 $105,000
3 $119,000
4 $108,000
5 $92,000

Production of the implants will require $1,500,000 in net working capital to start and additional net working capital investments each year equal to 15 percent of the projected sales increase for the following year Total fixed costs are $1,450,000 per year variable production costs are $230 per unit, and the units are priced at $355 each. The equipment needed to begin production has an installed cost of $24,000,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as seven-year MACRS property. In five years, this equipment can be sold for about 20 percent of its acquisition cost. AAI is in the 35 percent marginal tax bracket and has a required return on all its projects of 18 percent. Based on these preliminary project estimates, what is the NPV of the project? What is the IRR?