BETHESDA MINING COMPANY Bethesda Mining is a midsized coal mining company with 20 mines located in Ohio, Pennsyl- vania, West Virginia, and Kentucky. The company operates deep mines as well as strip mines. Most of the coal mined is sold under contract, with excess production sold on the spot market. The coal mining industry, especially high-sulfur coal operations such as Bethesda, has been hard-hit by environmental regulations. Recently, however, a combination of increased demand for coal and new pollution reduction technologies has led to an improved market demand for high-sulfur coal. Bethesda has been approached by Mid-Ohio Electric Company with a request to supply coal for its electric generators for the next 4 years. Bethesda Mining does not have enough excess capacity at its existing mines to guarantee the contract. The company is considering opening a strip mine in Ohio on 5,000 acres of land purchased 10 years ago for $4 million. Based on a recent appraisal, the company feels it could receive $6.5 million on an aftertax basis if it sold the land today. Strip mining is a process where the layers of topsoil above a coal vein are removed and the exposed coal is removed. Some time ago, the company would remove the coal and leave the land in an unusable condition. Changes in mining regulations now force a company to reclaim the land; that is, when the mining is completed, the land must be restored to near its original condition. The land can then be used for other purposes. Because it is currently operating at full capacity, Bethesda will need to purchase additional necessary equipment, which will cost $95 million. The equipment will be depreciated on a 7-year MACRS schedule. The contract runs for only four years. At that time the coal from the site will be entirely mined. The company feels that the equipment can be sold for 60 percent of its initial purchase price in four years. However, Bethesda plans to open another strip mine at that time and will use the equipment at the new mine. The contract calls for the delivery of 500,000 tons of coal per year at a price of $86 per ton. Bethesda Mining feels that coal production will be 620,000 tons, 680,000 tons, 730,000 tons, and 590,000 tons, respectively, over the next four years. The excess production will be sold in the spot market at an average of $77 per ton. Variable costs amount to $31 per ton, and fixed costs are $4,100,000 per year. The mine will require a net working capital investment of 5 percent of sales. The NWC will be built up in the year prior to the sales. Bethesda will be responsible for reclaiming the land at termination of the mining. This will occur in Year 5. The company uses an outside company for reclamation of all the com- pany's strip mines. It is estimated the cost of reclamation will be $2.7 million. In order to get the necessary permits for the strip mine, the company agreed to donate the land after reclama- tion to the state for use as a public park and recreation area. This will occur in Year 6 and result in a charitable expense deduction of $6 million. Bethesda faces a 25 percent tax rate and has a 12 percent required return on new strip mine projects. Assume that a loss in any year will result in a tax credit. EU Capital Budgeting Case Study Bethesda - Template Home Insert Draw Page Layout Formulas Data Review View Tell me Share Comments 12 AA h were Text Number Good Nara X Cut Copy Tom Pay Caloon Check cell | .. Input Delete Forma Condicions Format Fortune Table ST Filer Finds Sac Sensitivity : A F H L N R T G Alohida hobe attest $4,000,000 (sunk cool $6,50DDD $95.000.000 0.00 4 Depreciation Schedule Year Depreciation End book van 3 Assumptions: 4 Original and cost Aftertas current and value Post of equipment Salvage value of equipment at the end of year 4 os 7 finition a Time of profest in years Depreciation Rabas for 7-year MACRS 10 year 1 11 year 2 12 voara 18 year 4 14 Bontract sales units in ons 16 Contract sales privalon 15 rear 1 production 17 rear 2 production in Paar production 19 rear 4 production sn pot market priceton 21 fariable coston 5 Fuad cost 23 VWC percent of next years sales 34 Baclamation costs in years) as Charitable expense in year) se sabe 2T Required return 28 14.29% 24.49% 17.49% 12.4 500 000 $06 620.000 GODDDD 730.000 59000 $77.00 $31.00 $4,100.00 5.00% $2.700.000 $6.000.000 25 12.0095 Year 30 31 Bales 12 Contract Sales Units sa Pontract Sale Price/Ton 24 Total Contract Sales 26 Spot Market Units 37 Spot Market Sans Pricalton 28 TotalSpot Market Sales SA Total San 40. Variable Cost 41 Fixed Cost 42 Reclamation Costs in year 5 48. Depreciation 44 EBIT 46 Tamashare, also include the charitable expense deduction in year 6) 46 Net Income 41 4 DCF - EBIT-dep-tax or Ni+depl YAN 2 3 S 6 51 VWC 12 change in NWC Bethesd original + Ready m-+ 100% Evo Capital Budgeting Case Study Bethesda - Template Home Inst Draw Page Layout Formulas Data Review View Tell me Share Comments 12 AA E h wie Text Number Bad Good X Cut LOL Copy Nara Mate 8 Pay BIU A pesante . Calon Check Cell Expo Input Delete Format Tom Condicions Format Parang x Tube ST Filer Finds Sac Sensity F G H . M N N P 5 D 2 4 5 6 E10 A R SA 30 Year 31 Sales 22 Contract Sales Units 88 Contract Saias Pricarton 34 Total Contract Sales 36 36 Spot Market Units 27 Spot Market Sales Price Ton an Total Sport Market Sales 20 Total Sales 40 - Variable Coat 41 - Fbed Cost 49 - Reclamation Costin years) 43 - Depreciation 4 EBIT 45 -Taxes there also include the charitable expense deduction in year 6) 18 Not income 48 OCF-EDITceptne or NI + dep) 40 50 34 NWC Year 2 te change in NWC Yaar 2 CF from Assets 16 OCI ST Change in NWC 68 Capital Spending umant . Capital Spending (Land) 60 CF from Assets 61 Year 2 3 E3 Cumulative CF 14 E Payback ET NPV IR IRR E MRR 30 71 Acept based on NPV? 72 24 13 27 78 70 ED Bethesd original + Ready - + 100% BETHESDA MINING COMPANY Bethesda Mining is a midsized coal mining company with 20 mines located in Ohio, Pennsyl- vania, West Virginia, and Kentucky. The company operates deep mines as well as strip mines. Most of the coal mined is sold under contract, with excess production sold on the spot market. The coal mining industry, especially high-sulfur coal operations such as Bethesda, has been hard-hit by environmental regulations. Recently, however, a combination of increased demand for coal and new pollution reduction technologies has led to an improved market demand for high-sulfur coal. Bethesda has been approached by Mid-Ohio Electric Company with a request to supply coal for its electric generators for the next 4 years. Bethesda Mining does not have enough excess capacity at its existing mines to guarantee the contract. The company is considering opening a strip mine in Ohio on 5,000 acres of land purchased 10 years ago for $4 million. Based on a recent appraisal, the company feels it could receive $6.5 million on an aftertax basis if it sold the land today. Strip mining is a process where the layers of topsoil above a coal vein are removed and the exposed coal is removed. Some time ago, the company would remove the coal and leave the land in an unusable condition. Changes in mining regulations now force a company to reclaim the land; that is, when the mining is completed, the land must be restored to near its original condition. The land can then be used for other purposes. Because it is currently operating at full capacity, Bethesda will need to purchase additional necessary equipment, which will cost $95 million. The equipment will be depreciated on a 7-year MACRS schedule. The contract runs for only four years. At that time the coal from the site will be entirely mined. The company feels that the equipment can be sold for 60 percent of its initial purchase price in four years. However, Bethesda plans to open another strip mine at that time and will use the equipment at the new mine. The contract calls for the delivery of 500,000 tons of coal per year at a price of $86 per ton. Bethesda Mining feels that coal production will be 620,000 tons, 680,000 tons, 730,000 tons, and 590,000 tons, respectively, over the next four years. The excess production will be sold in the spot market at an average of $77 per ton. Variable costs amount to $31 per ton, and fixed costs are $4,100,000 per year. The mine will require a net working capital investment of 5 percent of sales. The NWC will be built up in the year prior to the sales. Bethesda will be responsible for reclaiming the land at termination of the mining. This will occur in Year 5. The company uses an outside company for reclamation of all the com- pany's strip mines. It is estimated the cost of reclamation will be $2.7 million. In order to get the necessary permits for the strip mine, the company agreed to donate the land after reclama- tion to the state for use as a public park and recreation area. This will occur in Year 6 and result in a charitable expense deduction of $6 million. Bethesda faces a 25 percent tax rate and has a 12 percent required return on new strip mine projects. Assume that a loss in any year will result in a tax credit. EU Capital Budgeting Case Study Bethesda - Template Home Insert Draw Page Layout Formulas Data Review View Tell me Share Comments 12 AA h were Text Number Good Nara X Cut Copy Tom Pay Caloon Check cell | .. Input Delete Forma Condicions Format Fortune Table ST Filer Finds Sac Sensitivity : A F H L N R T G Alohida hobe attest $4,000,000 (sunk cool $6,50DDD $95.000.000 0.00 4 Depreciation Schedule Year Depreciation End book van 3 Assumptions: 4 Original and cost Aftertas current and value Post of equipment Salvage value of equipment at the end of year 4 os 7 finition a Time of profest in years Depreciation Rabas for 7-year MACRS 10 year 1 11 year 2 12 voara 18 year 4 14 Bontract sales units in ons 16 Contract sales privalon 15 rear 1 production 17 rear 2 production in Paar production 19 rear 4 production sn pot market priceton 21 fariable coston 5 Fuad cost 23 VWC percent of next years sales 34 Baclamation costs in years) as Charitable expense in year) se sabe 2T Required return 28 14.29% 24.49% 17.49% 12.4 500 000 $06 620.000 GODDDD 730.000 59000 $77.00 $31.00 $4,100.00 5.00% $2.700.000 $6.000.000 25 12.0095 Year 30 31 Bales 12 Contract Sales Units sa Pontract Sale Price/Ton 24 Total Contract Sales 26 Spot Market Units 37 Spot Market Sans Pricalton 28 TotalSpot Market Sales SA Total San 40. Variable Cost 41 Fixed Cost 42 Reclamation Costs in year 5 48. Depreciation 44 EBIT 46 Tamashare, also include the charitable expense deduction in year 6) 46 Net Income 41 4 DCF - EBIT-dep-tax or Ni+depl YAN 2 3 S 6 51 VWC 12 change in NWC Bethesd original + Ready m-+ 100% Evo Capital Budgeting Case Study Bethesda - Template Home Inst Draw Page Layout Formulas Data Review View Tell me Share Comments 12 AA E h wie Text Number Bad Good X Cut LOL Copy Nara Mate 8 Pay BIU A pesante . Calon Check Cell Expo Input Delete Format Tom Condicions Format Parang x Tube ST Filer Finds Sac Sensity F G H . M N N P 5 D 2 4 5 6 E10 A R SA 30 Year 31 Sales 22 Contract Sales Units 88 Contract Saias Pricarton 34 Total Contract Sales 36 36 Spot Market Units 27 Spot Market Sales Price Ton an Total Sport Market Sales 20 Total Sales 40 - Variable Coat 41 - Fbed Cost 49 - Reclamation Costin years) 43 - Depreciation 4 EBIT 45 -Taxes there also include the charitable expense deduction in year 6) 18 Not income 48 OCF-EDITceptne or NI + dep) 40 50 34 NWC Year 2 te change in NWC Yaar 2 CF from Assets 16 OCI ST Change in NWC 68 Capital Spending umant . Capital Spending (Land) 60 CF from Assets 61 Year 2 3 E3 Cumulative CF 14 E Payback ET NPV IR IRR E MRR 30 71 Acept based on NPV? 72 24 13 27 78 70 ED Bethesd original + Ready - + 100%