Germanium and Gallium Mines
Individual assignment
Canada World Mining Inc. (CWMI) is evaluating to invest either in a new Germanium or Gallium mine. CWMI’s geologist has just finished his analysis of the mine site. He has estimated that both mines would be productive for 8-9 years, after which the Germanium or Gallium would be completely mined.
John Walker, CEO, has requested Mary Rose, CFO, to perform an analysis of both new mines and present her recommendations on whether the company should invest in either the Germanium mine or the Gallium mine.
Mary has used the estimates provided by John to determine the revenues that could be expected from the mines. She has also projected the expense of opening the mines and the annual operating expenses. The expected cash flows each year from the mine are shown in the table above. CWMI has a 12% required return on all projects.
Germanium and Gallium Mines
| Year | Cash Flow for
Germanium Mine ($ Million) |
Cash Flow for
Gallium Mine ($ Million) |
| 0 | -440 | -625 |
| 1 | 53 | -100 |
| 2 | 85 | -50 |
| 3 | 120 | 765 |
| 4 | 145 | 515 |
| 5 | 175 | 330 |
| 6 | 120 | 255 |
| 7 | 95 | 215 |
| 8 | 86 | 190 |
| 9 | -70 | 10 |
| 10 | – | -325 |
Germanium and Gallium Mines
Required:
- Calculate the payback period, discounted payback period, net present value, internal rate of return, modified internal rate of return and also any additional capital budgeting techniques that you think necessary.
- Compare and contrast the rationales and different assumptions made in different investment appraisal methods. Which method you think is closest to reality? Explain.
- In recent years, interest rate has been going up persistently in the economy. Describe and calculate (if necessary) how each method reacts to increasing cost of capital? Explain.
- Recommend whether CWMI should invest in the Germanium or the Gallium mine. Explain.
Notes: Read also the Brief Guidelines for Individual Assignment for more details of requirements.
Germanium and Gallium Mines
Brief Guidelines
You will perform an investment appraisal on the projects described in the case and write a business memo addressing to the company’s CEO.
Your memo should have about 6-8 pages. (Cover page, tables, graphs, pictures, appendices, references etc. are excluded.)
You should present your analysis in a professional manner such as nicely/professionally drawn graphs and tables are encouraged.
Put different ideas in different paragraphs and wherever appropriate label your ideas with different headings.
Think out of the box.
Draw your final conclusion and make your recommendations.
APA format is not required.