1

Economic Evaluation of Mine

MMR
Kakizaki
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1. Simple interest and Compound

interest
To start this lecture, we brush up on simple interest and compound
interest of Savings.
Table-1
P the principal
i interest rate/year
n the number of years
S Sum total (the principal＋interest)

Setting items like the above table, the total amount of principal and
interest after n years is as below.

In case of simple interest S＝P(1＋i×n) … ①

In case of compound interest S＝P(1＋i)n …②
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1. Simple interest and Compound

interest
Then, under the conditions in the table below, compare the amount of
simple interest calculation and compound interest calculation.
P 100 Juta
i 0.2 (20%)/year
n 10

S Sum total (the principal＋interest)

Table-3
P １ ２ ３ ４ ５ ６ ７ ８ ９ １０
J uta 100 120 140 160 180 200 220 240 260 280 300
Single
① (1+0.2*1) (1+0.2*2) … (1＋i×n) … (1+0.2*10)
Comp- J uta 100 120 144 173 207 249 299 359 430 516 620
1 2 10
-ound ② (1+0.2) 1+0.2) … (1＋i)n … 1+0.2)

Compound interest is used for the general calculation.

This interest rate is also used for the economic evaluation of the mine.
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２. Free Cash flow (FCF)

Free Cash flow means the Cash flow generated by primary business
activities. Using this Free Cash flow companies pay interest to creditors,
perform the redemption of the debt, pay dividends to shareholders or
performs the cancellation of shares.
Table-4
A Sales value
Material cost
Labor cost
Production cost Indirect cost (Overhead Cost)
B Depreciation
Selling and general administrative expenses
Interest payment
Taxes
A-B NOPAT（Net Operating Profit After Tax）
Expenses (like depreciation) not result in a payment of cash is added back
to NOPAT.
Free Cash flow＝NOPAT＋Depreciation
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3. Kind of project evaluation method

As a method for evaluating the profitability of the investment, the following
four methods are mainly known.
Currently being used is generally 3.3 NPV: Net Present Value and
3.4 IRR :Internal Rate of Return.

3.1 Payback period method

Payback period method is calculated that the investment amount average
value of the cash flow .

Payback period＝

3.2 ROI (Return on investment Method)

The rate of return method is calculated that earnings is divided by the
investment amount .

＝ ROI (Return on investment Method)=

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3.3 NPV (Net Present Value） Method

For example, as having 100 juta, and bank deposit interest rates in the
10％ right now, you will get 110 juta one year later.
・ So, 100 juta value after one year, How much is the current value
(＝present value) ?
It is 100・ ＝90.9 juta
.
・ So, 100 juta after 2 years, How much is the current value?

It is 100・ ＝82.6 juta

.
：
：
・ So, 100 juta after n years, How much is the current value?
100・ juta
.

Called the discount rate of 0.1 digits, which is used here.

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The method of calculating Present Value of a future cash flow is called

DCF (Discount Cash Flow) method. Total of PV of a DCF method and a
difference with an initial investment are calculated, and the method of
evaluating profitability is called NPV (Net Present Value) method.
NPV＝Total Present Value−Initial Investment
Formula it is expressed as follows.
S1 S2 Sn
NPV=（ ）＋ ＋… … ）−I …③
（１＋ｒ） 1 r 2 1 r n
I：Investment Amount
S：Free Cash Flow
r：Discount Rate
n：Period

At formula ③

1
1 i n is called PWF (Present Worth Factor).
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★ A simple example to decide investment using NPV method

Table-5
Investment Amount 100 J uta Rupiah
Cash Flow 20 J uta Rupiah
Discount Rate 6％
Project Period 7 Years

Simply calculating without NPV method, Payback period is 5 years.

However, it does not take into account the time value of money.
Therefore it’s need to be considered with the NPV method.
Table-6
Year 0 1 2 3 4 5 6 7
Investment −100 - - - - - - -
Free Cash Flow - 20 20 20 20 20 20 20
PWF ；6％ - 0.94 0.89 0.84 0.79 0.75 0.70 0.67
PV - 18.9 17.8 16.8 15.8 14.9 14.1 13.3
NPV −100 -81.1 -63.3 -46.5 -30.7 -15.8 -1.7 11.6
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★ Get NPV Using Excel

Figure-1
Figure-2 10

Figure-2
3.4 内部利益率（IRR：Internal Rate of Return）法 11

3.4 IRR (Internal Rate of Return） Method

Internal Rate of Return is that the value of the discount rate that makes
the net present value zero.
In short, IRR=０ at formula ③.
By comparing the ratio, IRR method is to evaluate the relative merits of
investment projects.
Condition to execute the investment is “ IRR is greater than its target
rate”
S1 S2 Sn
I =（ ）＋ 2 ＋… … n ） … ④
（１＋ｒ） 1 r 1 r

★ Calculation of IRR
There are several method to calculate the IRR.
Orthodox methods is the repeated calculation.
Other method is to use the Goal seek and IRR function of Excel.
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Figure-3
Cal cu l ate I R R
Ex p-１ 0 1 yeay 2 year 3 yeay 4 year
-100 40 35 40 55

(1) R ep ea ted ca l cu l a ti on
① Su pp osin g R ate=0.2
0 1 yeay 2 year 3 yeay 4 year
-100 40 35 40 55
PV 33.333 24.306 23.148 26.524
NPV 7.311
You understand that rate is more large this nuunmber.
② Su pp osin g R ate=0.3
0 1 yeay 2 year 3 yeay 4 year
-100 40 35 40 55
PV 30.769 20.710 18.207 19.257
NPV -11.057
You understand that rate is the nuunmber betweem ① and ②.
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③ Su pposin g R ate=0.25
0 1 yeay 2 year 3 yeay 4 year
-100 40 35 40 55
PV 32.000 22.400 20.480 22.528
NPV -2.592
You understand that rate is little bit smaller than ③.
④ Su pposin g R ate=0.24
0 1 yeay 2 year 3 yeay 4 year
-100 40 35 40 55
PV 32.258 22.763 20.979 23.264
NPV -0.736
⑤ Su pposin g R ate=0.236
0 1 yeay 2 year 3 yeay 4 year
-100 40 35 40 55
PV 32.362 22.910 21.184 23.566
NPV 0.023
Because of above calculations.
IRR= 23.6%
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(2) U se Excel Fu n cti on (I R R )

A B C D E F G
1
2 0 1 yeay 2 year 3 yeay 4 year
3 -100 40 35 40 55
4 IRR 23.6%
5
・Open mathematical f ormula of Excel,
then select f inancial f unction.
・Point out C4、then open dialog and
selecting IRR
・Insert C3∼F3 to Range of the dialog.
・Answ er is C4 ⇒ 23.6％
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★Project Evaluation using DCF Method

・Example: Comparing 3 projects (Total Profits are same)
When discount rate is 6％, NPV and IRR of 3 Project is calculated as
following.
Table-7
Year 0 1 2 3 4 5
A -200 70 70 70 70 70
PV -200 66.04 62.30 58.77 55.45 52.31
NPV 94.87
IRR 22%
B -200 100 100 70 40 40
PV -200 94.34 89.00 58.77 31.68 29.89
NPV 103.69
IRR 28% Table-8
C 0 -200 150 100 60 40 NPV IR R
PV -188.68 133.50 83.96 47.53 29.89 A 95 22％
NPV 106.20 B 104 28％
IRR 36% C 106 36％

From these results, PJ-C is best and Project-B is next.

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4. Fixed Profit per year

４.1 A kind interest
For example, if there is a fixed annual profit of 100 juta, Consider the
present value at the end of the year and the sum of the present value.
Table-9
1 year 2 year 3 year 4 year 5 year
Fixed Sum 100 100 100 100 100
Discount Rate 0.1 0.1 0.1 0.1 0.1
Present Worth Factor 0.9091 0.8264 0.7513 0.6830 0.6209
1/(1＋0.1)n 1/(1.1)1 1/(1.1)2 1/(1.1)3 1/(1.1)4 1/(1.1)5
Present Value 90.91 82.64 75.13 68.30 62.09
Total Present Value 90.91 173.55 248.69 316.99 379.08

There is a well-known formula to determine the total amount of the

present value, called Inwood formula.
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Inwood formula
a 1 i n 1 a
A (Total Present Value)＝ ［ ］ ＝ ［1-(1+i)-n
］ …⑤
i 1 i n i
Here, a is annual profit.

At table-9 using this formula, calculate the total present value of each
year.
a -n 100
A＝ ［1-(1+i) ］＝ ［1-(1+0.1)-5］＝1,000×(1-0.6209)＝1,000×0.3791≒379.08
i 0.1
This number is same result with table-9.
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Proof of Inwood Formula

a
PV of a at the end 1st year
1 i
a
PV of a at the end 2nd year 2
1 i
a
PV of a at the end nth year 1 i n

Therefore, total present value obtained in each year “S” is showed below.
a a a
A＝ ＋ 2 ＋………＋ n …⑥
1 i 1 i 1 i
This is the sum of the geometric progression.
1
Multiplying on both sides of ⑥
 1 i
1 a a a
A( ) ＝  2 ＋ 3 ＋………＋ n 1 …⑦
1 i 1 i 1 i 1 i
Then, ⑥−⑦
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1 a a
A (1 )＝ n 1
1 i 1 i 1 i
1 i 1 a 1
A( )＝ (1− )
1 i 1 i 1 i n
i a 1 i ｎ 1
A( )＝ ( n )
1 i 1 i 1 i
 
A＝ ［ ］＝ ［1−(1+i)-n ］

From this result

Inw ood Formula is proved.
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If the amount of money at the time of accumulating the current value

obtained from this Inwood formula at the compound interest i for further n
years is set to T,

If the amount of money at the time of accumulating the present value

obtained f rom this Inw ood f ormula at the compound interest i f or f urther n years
is set to T,
a 1 i n  1 1 i n  1 a
T＝｛ ・ n ｝・(1+i) ＝a・
n
＝ ・ 1 i n 
1 …⑧
i 1 i i i
If ⑧ is solved about a,
T・i
a＝ …⑨
1 in 1
The meaning of this f ormula shows the amount of money which should be
prepared every year, in order to pay collectively the amount of money T, in n
years.
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Example Calculation …A kind interest rate

Exampl-1
How much is Total of Principal and Interest at the time of accumulating 50 J uta
at 10% of Compound Interest f or 15 years?
From ② S＝P(1＋i )n
＝50 J uta×(1＋0.1 )15＝50 J uta×4.17725≒209 J uta Rp
Example-2
How much is the Present value of 50 J uta Rp w hich should be received af ter 15
years? Here, an interest rate is 10%.
50 Juta
From ③ P＝
1 i n
50 Juta 50 Juta
＝ ＝ ≒12 J uta Rp
1 01 15 4.17725
Example-3
How much is the total amount at the time of accumulating 50 J uta Rp at 10% of
Compound Interest f or 15 years every year?
1 i n  1
From ⑦ T＝a・
i
1 0.1 15  1
＝50・ ＝500・(4.1772−1)＝500・3.1772≒1,589 J uta Rp
0.1
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Example-4 (Inw ood Formula)

When 50 J uta Rp enters every year, how much is the total amount of the Present
Value w hich discount rate is 10％?
a
From ④ A＝ ［1-(1+i)-n ］
i
50
＝ ［1-(1+0.1)-15］＝500×(1-0.2394)＝500×0.7606≒380 J uta Rp
0.1
Example-５
Af ter 15 years the payment of 400 J uta Rp is required and compound interest is at
10％, how much is a reserved amount per year?
T・i
From ⑨ a＝
1 i n 1
400・0.1 40 40
＝ ＝ ＝ ≒12.6 J uta
1 0.1 15 1 4.1772 1 3.1772
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4.2 2 kind of interest rate

The interest rate above-mentioned w as one kind, H. D. Hoskold of Britain should
take into consideration tw o kinds of interest rates.
One of 2 kinds of interest rate is an ordinary interest rate or the loan interest rate
“i". Moreover, the dangerous interest rate is set up independently and it expressed
w ith “s”.
s＝r・i
“s” expresses Desired Interest rate in a mining company.
The dangerous interest rate “s” shall be attached to Present value of the dropped
capital, and “a−A・s” is added up at the end of each year.
The dif f erence of this amount of money and annual income prof it, “a−A・s” is
usually accumulated at a kind interest rate.
1 i n  1
Theref ore、at ⑧ a・ , above amount of money "a−A・s" is substituted
i
f or ”a”
a−A・s
〔 1 i n −1〕
i
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This amount of money exist the end of n-year af ter.

This must be equal Present Value A in the end of n-year af ter.
a−A・s 
A＝ 〔 1 i n −1〕
i
Solve this,
a 1 i n 1 a
A＝ ＝ i … ⑨
i s 1 i n 1 s
1 i n −1

This is the f amous Hoskold f ormula.

The prof it of the f ixed amount a every year w ill be expected f or n years.
How ever, d years bef ore that are unprof itable.
The present value in that case is considered.
At the end of d years the present value of the amount of money w hich enters
af ter that is set to A,
A
P＝ d
1 i
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The f ormula of Hoskold is substituted f or this A.

a 1
P＝ ・ … ⑩
1 i d s i 1 i n 1 1

Moreover, interests P・s to P is collected every year, and the amount of money
w hich saves this every year and places it at the interest rate i becomes below at the
same time it collects the amounts of investment P.
P・s  n
P 
P＋ [ 1 i 1]＝ [i＋s{ 1 i d n 1}]
i i
Upper f ormula and ⑧ f ormula become equal. namely
a n 
P  d n
・ 1 i 1 ＝ [i＋s{ 1 i 1}]
i i
It becomes below w hen it solves about P.
n 
1 i 1
P＝a・ d n …⑪
i＋s 1 i 1
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Example Calculation …2 kinds interest rate

Example-１
In case, 5 J uta Rp enters f or 14 years every year;
Person w ho purchase the right to receive this amount of money w ish the desired
interests of 8％ per year and also make an accumulation interest rate 3％ per
year about a self investment, how much is the amount of money f or buying over
(namely, current value)?
This is typical example of Hoskold Formula.
a 1 i n 1 50 1 0.03 14 1
From ⑨ A＝ ＝
i s 1 i n 1 0.03 0.08 1 0.03 14 1
5 0.51259
＝ ≒36.1 J uta Rp
0.03 0.08 0.51259
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Example-2
15 Milyar Rp w as invested f or Mine Develop and others Facilitis preparation f or
three years.
When the prof it of 20 Milyar Rp is expected f or 12 years af ter that every year,
interests are made into 15％ per year and an accumulation interest rate is made
into 3％ per year, how much is the amount of money f or buying over?
n 
1 i 1
From ⑪ P＝a・  d n
i＋s 1 i 1
12 
1 0.03 1
＝20・ 15
0.03＋0.15 1 0.03 1
0.425761
＝20・
0.113695
≒74.9 Milyar Rp
How ever, Present Value = Purchase Price + Initial Investment Amount
Theref ore,
Purchase Price＝Present Value−Initial Investment Amount
＝74.9−15＝59.9 Milyar Rp
Example of IRR of Feasibility Study 28

Example of IRR ： Feasibility Study of A Coal Mine

Calculate IRR from below table by using Excel, IRR=32.17％

1 2 3 4 5 6 7 8 9 10
Production (Tons) 0 19,600 156,200 216,400 276,700 262,000 280,700 279,400 272,200 278,300

Sales (US dollars) 0 784,000 6,248,000 8,656,000 11,068,000 10,480,000 11,228,000 11,176,000 10,888,000 11,132,000

Investment (US $) -1,824,400 -910,400 -1,351,000 -243,413 -1,564,900 -443,900 -400,500 -572,500 -910,000 -561,500

Running cost -1,369,081 -2,020,277 -3,879,586 -4,040,406 -4,839,573 -4,483,277 -4,576,852 -4,554,166 -4,518,918 -4,584,441

Prof it -3,193,481 -2,146,677 1,017,414 4,372,181 4,663,527 5,552,823 6,250,648 6,049,334 5,459,082 5,986,059

Tax and other -1,731,200 -2,213,600 -2,096,000 -2,245,600 -2,235,200 -2,177,600 -2,226,400
(20% of sales)
Cash f low -3,193,481 -2,146,677 -1,075,386 2,640,981 2,449,927 3,456,823 4,005,048 3,814,134 3,281,482 3,759,659
11 12 13 14 15 16 17 18 19 20
Production (Tons) 261,600 252,800 240,900 255,500 252,300 246,500 232,600 228,000 228,100 176,500

Sales (US dollars) 10,464,000 10,112,000 9,636,000 10,220,000 10,092,000 9,860,000 9,304,000 9,120,000 9,124,000 7,060,000

Investment (US $) -932,900 -426,500 -879,500 -401,000 -965,500 -318,900 -1,010,500 -635,500 -460,000 -611,500

Running cost -4,479,945 -4,454,155 -4,387,977 -4,477,315 -4,474,387 -4,510,117 -4,118,726 -3,993,750 -4,017,893 -3,818,486

Prof it 5,051,155 5,231,345 4,368,523 5,341,685 4,652,113 5,030,983 4,174,774 4,490,750 4,646,107 2,630,014

Tax and other -2,092,800 -2,022,400 -1,927,200 -2,044,000 -2,018,400 -1,972,000 -1,860,800 -1,824,000 -1,824,800 -1,412,000

Cash f low 2,958,355 3,208,945 2,441,323 3,297,685 2,633,713 3,058,983 2,313,974 2,666,750 2,821,307 1,218,014