Bethesda Mining is a midsized coal mining company with 20 mines located in Ohio, Pennsylvania, West Virginia and Kentucky. The company operates depp mines as well as strip mines. Most of the coal ined 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 regualtions. 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 just been approached by Mid-Ohio Electric company with a request to supply coal for its electric generatiors 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 5000 acres of land purchased 10 years ago for 5.4 million. Based on a recent appraisal the company feels it could receive $7.3 million on an aftertax basis if it sold the land today.

Strip mining is a process where the layers of topsolil above a coal vein are removed and the exposed coal is removed. some time ago, the company would simply remove the coal and leave the land in an unusable condition. changes in mining regulations now orce a company to reclaim the land: that is when the maining is completed the land must be restored to near its original condition. The land can then be used for other purposes. As they are currently oeprating at full capacity, Bethesda will need to purchase additional equipment, which will cost $49 million. The equipment will be depreciated ona a seven year MACRS schedule. The contract only runs for 4 years. At that time the coal from the site will be entirely mined. The company feels that the equipment can be sold for 60% of its inital purchase price. However, Bethesda plans to open another strip mine at the time andwill use the equipment at the new mine.

The contract calls for the delivery of 500000 tons of coal per year at a price of $70 per ton. Bethesda Mining feels that coal production will be 750000 tons, 810000 tons, 830000 tons, and 720000 tons respectively over the next 4 years. The excess production will be sold in the spot market at the average of $64 per ton, Variable costs amount oto $29 per tona nd fixed costs are $4.2 million per year. The mine will require a net working capital investment of 5% of sales. The NWC will be built up in the year prior to the slaes. Bethesda will be responsible for reclaiming the land at termination of the mining. This will occur in Year 5. The company uses an outside for reclaimation of all the comapny's strip mines. It is estimated the cost of reclamation will be $3.9 million. After the land is reclaimed the company plans to donate the land to the state for use as a public park and recration area as a condition to receive the necessary mining permits. This will occur in Year 5 and will result in a charitable expense deduction of $7.3 million. Bethesda faces a 38% tax rate and ahas a 12% required return on new strip mine projects. Assume a loss in any year will result in a tax credit. You have been approached by the president of the company with a request to analyze the project. Calculate the payback period, profitability index , net present valu and internal rate of return fo rht enew strip mine. Should Bethesda Mining tak the contrac tand open the mine?