Bethesda Mining Company mar Bethesda Mining is a midsized coal mining company with 20 mines located in Ohio. Pennsylvania. 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 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 Efectric 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 xisting mines to guarantee the contract. The company is considering opening a strip mine in Ohio on 5,000 acres of land purchsed 10 years ago for $4 million. Based on a recent appraisal, the company feels it could receive $6.5 miion 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 feave the fand 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 urposes. 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-vear MACRS schedule. The contract runs for only four vears. At that time the coal from the site will be entirely mined. Tlie 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 tie and wll 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 require a net working capital investment of 5 percent of sales. The NWC will be built up in the year prior to the safes. er year. The mine will a will be responsilb e land a ing. This will occur in Yea The company for reclamation of all the company's strip mines. It is estimated the cost of reclamation will be $2 oraticon ra This will occur im Ycar andl i a echariiabble ias a 12 percent required re urn on lle sirip li ll e no cci: Assume s doducn of S Btsa 23 peni tax re and nant a loss n am rwarwill resul in a tan credit. analy You have been approached by the presiden profitability inds, nt present valie, and internal rac of rrn for the new strip mine. Sthould Bethesda Mining take he contract anmcl opn the mime? company with a requ 0 e project. Cal e payback period, Page 204 Bethesda Mining Company mar Bethesda Mining is a midsized coal mining company with 20 mines located in Ohio. Pennsylvania. 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 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 Efectric 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 xisting mines to guarantee the contract. The company is considering opening a strip mine in Ohio on 5,000 acres of land purchsed 10 years ago for $4 million. Based on a recent appraisal, the company feels it could receive $6.5 miion 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 feave the fand 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 urposes. 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-vear MACRS schedule. The contract runs for only four vears. At that time the coal from the site will be entirely mined. Tlie 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 tie and wll 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 require a net working capital investment of 5 percent of sales. The NWC will be built up in the year prior to the safes. er year. The mine will a will be responsilb e land a ing. This will occur in Yea The company for reclamation of all the company's strip mines. It is estimated the cost of reclamation will be $2 oraticon ra This will occur im Ycar andl i a echariiabble ias a 12 percent required re urn on lle sirip li ll e no cci: Assume s doducn of S Btsa 23 peni tax re and nant a loss n am rwarwill resul in a tan credit. analy You have been approached by the presiden profitability inds, nt present valie, and internal rac of rrn for the new strip mine. Sthould Bethesda Mining take he contract anmcl opn the mime? company with a requ 0 e project. Cal e payback period, Page 204