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Case For Individual Essay

Jinyu Gold Mining is evaluating two mutually exclusive projects - opening a new gold mine or a coal mine. Both mines have estimated cash flows over 6 years as shown in Table 1. The financial officer must analyze and compare the projects using methods like IRR, NPV, payback period to recommend which mine to open. The analysis report should explain cash flow estimates, apply evaluation methods to the projects, discuss advantages and disadvantages of each method, and recommend one project.

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271 views

Case For Individual Essay

Jinyu Gold Mining is evaluating two mutually exclusive projects - opening a new gold mine or a coal mine. Both mines have estimated cash flows over 6 years as shown in Table 1. The financial officer must analyze and compare the projects using methods like IRR, NPV, payback period to recommend which mine to open. The analysis report should explain cash flow estimates, apply evaluation methods to the projects, discuss advantages and disadvantages of each method, and recommend one project.

Uploaded by

ksngan
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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AF3313 – Individual Essay

You are just hired by Jinyu Gold Mining as the company’s financial officer. John Jin, the
sole owner of the company, is evaluating two mutually exclusive projects.

Jinyu has just been approached by a jeweler with a request to supply gold for its
products for next six years. The company does not have enough excess capacity at its
existing mines to guarantee the contract. It is considering opening a new gold mine in
China. Betty Bu, the company’s geologist, has just finished her analysis of the mine site.
She has estimated that the mine would be productive for six years, after which the gold
would be completely mined. You have used the estimates provided by Betty and the
agreed prices with the jeweler to determine the revenues that could be expected from the
mine. You have also projected the expense of opening the mine and the annual operating
expenses. If the company opens the mine, it will cost $80 million today, and it will have
a cash outflow of $20 million seven 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 Table 1.

On the other hand, Jinyu owns 5,000 acres of land with a high-sulfur coal vein
(also in China) purchased 10 years ago for $6 million. Based on a recent appraisal, the
company feels it could receive $10 million on an after-tax basis if it sold the land today.
The coal mining industry has been hard-hit by environmental regulations. Recently,
however, a combination of increased demand for coal and new pollution reduction
technologies has led to an improved market for high-sulfur coal. The company is
considering opening the coal mine with all production to be sold in the spot market over
the next four years. At that time the coal from the site will be entirely mined. Additional
necessary equipment will cost $85 million today and can be used only for this project.

Jinyu will be responsible for reclaiming the land at termination of the coal mining.
This will occur in year 5. The land can then be used for other purposes. The company
plans to donate the land for use as a public park and recreation area. This will occur in
year 6. The expected cash flows from year 1 to year 6 are shown in Table 1.

With limited capital, Jinyu can proceed with only one of the projects. John, who
is not knowledgeable about finance concepts, has never used discount rate to do project
evaluation, though he understands the concepts of time value of money. He has heard
from friends about internal rate of return being a single number summarizing the return of
a project and would like to use this measure to help make decision. But he also knows
that other companies use other methods such as payback period, discounted payback
period, profitability index, net present value, etc. He has asked you to prepare a report:

• To explain the factors considered in deriving the estimated incremental cash


flows;
• To explain how the various methods can be applied to evaluate the two projects;
• To discuss the advantages and disadvantages of each method specific to the two
projects; and
• To make recommendation on which mine to open now.
Table 1

Year Expected Cash Flows of Gold Mine Expected Cash Flows of Coal Mine

0 (80,000,000) ?
1 16,000,000 26,000,000
2 18,000,000 31,500,000
3 28,000,000 32,000,000
4 36,000,000 69,000,000
5 39,000,000 (1,700,000)
6 25,000,000 (3,000,000)
7 (20,000,000)

Note that:

• The deadline of your report is 15 Nov 2010. Your boss will definitely not accept any
excuse for missing it.

• Your report should be limited to 1,000 words. Your boss is very busy. Do not make it
too long.

• All calculations should be put in appendices. (The word limit does not apply to
appendices.)

• Your boss is not very patient. Give him discussion only specific to the case. Do not talk
about any general but irrelevant points.

• Your boss is highly demanding. Use correct English.

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