How to calculate the payback period for a coal mine?

To calculate the payback period for a coal mine, follow these steps:

1. Initial Investment: Determine the total initial investment made for the coal mine, including costs such as land acquisition, equipment, construction, and other startup expenses.

2. Annual Cash Inflows: Estimate the annual cash inflows from the mine. This typically includes revenue from coal sales minus operating expenses such as labor, maintenance, and utilities.

3. Annual Cash Outflows: Account for any regular annual expenses not included in operating expenses, such as loan repayments or additional capital expenditures.

4. Net Annual Cash Flow: Calculate the net annual cash flow by subtracting the annual cash outflows from the annual cash inflows.

5. Cumulative Cash Flow: Track the cumulative cash flow each year by adding the net annual cash flows cumulatively until the total equals or exceeds the initial investment.

6. Payback Period: Identify the exact point in time when the cumulative cash flow equals the initial investment. This is the payback period.

Here’s an example calculation for clarity:

• Initial Investment: $10 million
• Annual Cash Inflows: $3 million per year
• Annual Cash Outflows (Operating expenses, etc.): $1 million per year
• Net Annual Cash Flow: $3 million - $1 million = $2 million per year

Step-by-Step Calculation:

• Year 1: $2 million
• Year 2: $2 million + $2 million = $4 million
• Year 3: $4 million + $2 million = $6 million
• Year 4: $6 million + $2 million = $8 million
• Year 5: $8 million + $2 million = $10 million

In this example, the payback period is 5 years.

Keep in mind:

• Take into account any changes in cash flows over the years due to fluctuating coal prices or operational efficiencies.
• Tax impacts and salvage values can also affect the net annual cash flows and should be included if relevant.
• This method does not consider the time value of money; for a more detailed analysis, consider using discounted cash flow (DCF) techniques.