Capital Budgeting Bullock Gold Essay

[calculations available in full version]

The calculations were done in Excel, except the payback period. This was done starting at -850 and then adding back each year's cash flow. Year 5 started with a deficit of 20, which amounts to 31 days worth of payback, in other words the payback will be complete by the end of January in Year 5.

2. Based on this analysis, the company should open the mine. There are several reasons why. First, there is no rule of thumb for Bullock with respect to payback period – and once the project has started it will be finished, so that is not really a great way to analyze the problem.

Second, IRR and MIRR are both above the cost of capital, which is assumed to be the company's hurdle rate of 12%. A project that returns above the cost of capital is normally a viable one.

Third, the net present value is positive. As a rule of thumb, any project with a positive NPV should be undertaken.

The key here is that there are no other projects (options) for comparison. These metrics are great to compare, say, two gold mines to see which one is better. In this case, with only one, Bullock Gold is faced with a go/no-go decision. Thus, any IRR or MIRR above the cost of capital, or any positive NPV, means that Bullock should pursue this gold mine project.

It is worth checking the assumptions that underlie these calculations, of course. The price of gold fluctuates a lot, so there should be a certain margin of error built into the future cash flow projections – or that volatility should be built into the discount rate. If the numbers are solid, Bullock should pursue this project.