Overview
se outside research sources in addition to the text book BNDL Essentials of Corporate Finance w/ Connect Publisher: McGraw Hill
ISBN# 9781264786169(journals, news articles, etc. -- but NOT Wikipedia). Properly document your sources using APA style in-text references and a reference list.
Boondock Silver Mining
Beth Boondock, owner of Boondock Silver Mining, is reviewing the details of a new silver mine in South Dakota. According to the company's geologist, Dory Donovan, a detailed analysis of the mine suggests it would be productive for eight years. After that amount of time, all of the silver ore would be completely mined. Dory sent an estimate of the silver deposits to Gina Albert, the company's chief financial officer. Beth has contacted Gina to request a full financial analysis of the new mine and to present her recommendations on whether the company should open the new mine.
Gina used the estimates provided by Dory to determine the revenues that could be expected from the mine. She has projected both the annual operating expenses of the new mine and the expense of opening the mine. If the company opens the mine, it will cost $635 million today, and it will have a cash outflow of $45 million nine years from today in costs associated with closing the mine and reclaiming the surrounding area. The expected cash flows each year each year from the mine are shown below:
Year | Cash Flow |
0 | - $635,000,000 |
1 | 89,000,000 |
2 | 105,000,000 |
3 | 130,000,000 |
4 | 173,000,000 |
5 | 205,000,000 |
6 | 155,000,000 |
7 | 145,000,000 |
8 | 122,000,000 |
9 | - 45,000,000 |
Questions:
- 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.
- Based on your analysis, should the company open the mine? Why or why not?
paper and excel
word firt part
1. NPV
According to the text, the NPV rule states that "An investment should be accepted if the NPV is positive and rejected if it is negative." What does an NPV of zero mean? If you were a decision-maker faced with a project with a zero NPV (or very close to zero) what would you do? Why?
2. FORECASTING ERROR (RISK)
What is a "forecasting error"? Why is it important to the analysis of capital expenditure projects?
Please number each of your answers. This is very important so that I understand which questions you are responding to.
part2 FIN3400 Capital Budgeting Assignment
Objective:
The objective of this assignment is to help you understand the process a company uses to determine the merits of a capital project. Companies use Net Present Value (NPV) and Internal Rate of Return (IRR) to determine if a project meets the required return. This assignment ties into SLO 10- Finance - Students will demonstrate the integration of specific knowledge and business skills in finance such as investment, financial policy, and commercial bank management. of creating an Income Statement, perform a scenario analysis, and calculate important financial metrics such as Net Present Value (NPV), Internal Rate of Return (IRR), and perform sensitivity analysis. You will apply these concepts to a hypothetical business project and analyze the results in different scenarios.
Part 1: Create a Simple Income Statement for Each of the Three Scenarios
- Introduction to the Business Scenario: Imagine you are starting a small business that sells a product. Below are the basic assumptions for an optimistic, realistic, and pessimistic scenario:
Assumptions | Optimistic | Realistic | Pessimistic |
Units | 5,000 | 4,500 | 4,000 |
Sales Price | $95.00 | $90.00 | $85.00 |
Variable Costs | $60.00 | $64.00 | $68.00 |
Depreciation | $10,000 | $10,000 | $10,000 |
Interest Expense | $2,000 | $2,000 | $2,000 |
Fixed Costs | $25,000 | $25,000 | $25,000 |
Tax Rate | 25.00% | 25.00% | 25.00% |
- Income Statement Format: Based on the above assumptions, create Income Statements for your business for each of these scenarios. Include the following line items:
- Sales
- Variable Costs
- Gross Profit
- Depreciation
- Fixed Costs
- Operating Income
- Interest Expense
- Taxable Income
- Taxes
- Net Income
Instructions:
- Fill out the income statement using the values provided.
- Calculate the missing values such as Gross Profit, Operating Profit, Taxable Income, Taxes, and Net Income.
- Calculate Operating Cash Flow
Part 2: Scenario Analysis Using NPV and IRR
- Project Assumptions:
Assumptions for the Project:
- Initial Investment (Year 0): $200,000.00
- Discount Rate: The WACC for the company is 12%.
- Project Life: 5 years
- NPV and IRR Calculations: Once Income Statements have been completed, calculate the NPV and IRR for each of the scenarios. You may use the Excel function keys or mathematical formulas. Be sure to show your work. Use operating cash flow for your cash inflows. Assume the cash flow remains constant for the 5-year life of the project.
Part 3: Sensitivity Analysis
- Purpose of Sensitivity Analysis: Sensitivity analysis is used to understand how the NPV and IRR are affected by changes in key assumptions. In this case, you will vary both the price and variable costs.
- Instructions:
- Perform sensitivity analysis on the following variables:
- Projected Cash Flows: Vary the price of the project using pessimistic values. Construct the New Income Statement for this sensitivity variable.
- Projected Variable Costs: Vary the variable costs of the project using pessimistic values. Construct the New Income Statement for this sensitivity variable.
- For each change, recalculate the NPV and IRR.
- Use the What If Analysis to construct a data table for each change.
- Analysis:
- Discuss the results of the sensitivity analysis: How does changing each variable affect the NPV and IRR? Which assumptions have the greatest impact on the results?
- Based on all the information presented conclude as to the viability of the project. Be sure to defend your decision.
Deliverables:
- Income Statement: Include completed Income Statements for each of three scenarios and two sensitivity analysis assumptions. Use the correct format.
- NPV and IRR Calculations: Provide NPV and IRR calculations for each of three scenarios and two sensitivity analysis assumptions. Be sure to show your work.
- Sensitivity Analysis Table: Present a table that shows the results of the sensitivity analysis for varying price and variable cost assumptions.
- Analysis Report: Write a short report (300 – 500 words) summarizing your findings from the sensitivity analysis and ultimate project decision. Highlight key takeaways about how each factor influences the project's financial metrics.
Submission Guidelines:
- All Income Statements, NPV calculations, and IRR calculations must be submitted on an Excel spreadsheet.
- All analysis must be submitted on a Word document using SafeAssign.
- Be sure to explain the steps you took to complete each part of the assignmen