Economic Evaluation and Investment Decision Methods

24-26 October 2011

Colorado School of Mines

John Stermole

Andy Pederson

The Economic Evaluation and Investment Decision Methods course covers industry standard techniques to determine monetary positives or negatives of large scale industrial projects. The calculation and interpretation of Net Present Value (NPV) and Internal Rate of Return (IRR) are studied in depth. This session of the course was taught by John Stermole, President of Investment Evaluations Corporation. John was assisted in teaching the course by Andy Pederson, Operations Manager for Investment Evaluations Corporation.

The course provided several economic calculations to determine present, future or amortized worth of an investment given the other two as well as interest rate and number of compounding periods. These calculations are impressive and are imperative to calculating present value by hand. To the present mining engineer, the use of a spreadsheet will be incredibly useful. I know that excel has all the formulas you could ever want, but I like to have the period by period calculations available to me. The most useful of the economic calculations is the one for present value given future value (=1/((1+interest rate)^period). To use this all you need to do is set out all the periods as a column and reference the period cash flows. The sum of the results is the NPV.

Having the results in this format instead of as the results of a cell calculation is that they are available to be used in charts on a period by period basis (you are also unlikely to forget to add back in the initial investment, a shortcoming of the function in excel). These charts can be very helpful in illustrating the cash flows.

Cumulative Net Present Value shows the cash returns and final present value as well as the break-even point (the point where the initial investment is paid back).

Cumulative Cash Position shows how much cash is invested at each period including interest. This chart is usually shown at the IRR interest rate so that the final cash position is zero.

My favorite part of having all the calculations shown is that it is so easy and self-evident to show the Internal Rate of Return. Just set the sum of the NPV values to zero by changing the interest rate. The resulting interest rate is where you would be making no money on this project compared to investing money elsewhere at the given interest rate.

I learned a lot from John and Andy and would recommend this course to anyone in the mining industry who wanted to know more about the time value of money. I also need to apologize to Dr. Felipe Calizaya for not paying enough attention when he tried to teach me this same course at the University of Utah.

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