what companies doCAPITAL BUDGETING PROCESS AND
DECISION CRITERIA
9-1 Introduction to capital budgeting
9-2 Payback methods
9-3 Accounting-based methods
9-4 Net present value
9-5 Internal rate of return
9-6 Profitability index
9-7 Capital budgeting in practice
INVESTMENT IN GHANA PROVIDES AN IMPRESSIVE RETURN FOR PMI GOLD
A January 2012 pre-feasibility study reported good
news for PMI Gold Corporation (PMI), an Australian
resource company jointly listed on the Australian
Securities Exchange, Toronto Stock Exchange and
Frankfurt Stock Exchange. The study estimated that
PMI’s flagship 100%-owned Obotan Gold Project
in Ghana, West Africa, could produce an average
annual yield of 205,600 oz. of gold over an initial
expected mine life of 11.2 years.
The financial implications of that production
were substantial. PMI Gold’s investment in the
Ghanaian project had an estimated net present
value (NPV) of US$680.5 million and post-tax NPV
of US$416.4 million, assuming a US$1,300/oz.
gold price and 5% discount rate. It was expected
to produce a pre-tax internal rate of return (IRR)of more than 42% (equivalent to a post-tax IRR of
31%), with a 2.9-year payback period after gold
production begins. The company announced that
it expects initial capital costs of US$183.5 million
in addition to pre-strip mining costs of US$68.3
million, and forecast the total cash cost over the
life of the mine to be US$690.2/oz. (including
royalties, refining costs and pre-strip mining costs).
Canadian investors reacted positively to the report.
PMI Gold’s Canadian closing share price rose
2.4% in the second full day of trading following
the announcement, while its closing share price
on the Frankfurt Stock Exchange rose by 3.1%. Its
Australian closing share price remained unchanged
over the same period. PMI was subsequently
acquired by Asanko Gold Inc. (listed on the New
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