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 is sold under contract with excess production being sold in the spot, or open, market. The coal mining industry, especially high-sulfur coal operations like Bethesda, have been hard-hit by environmental regulations. Recently a combination of increased demand for coal and new pollution reduction technologies has led to 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 generators for the next four 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 $6.4 million. Based on a recent appraisal, the company feels it could receive $7.5 million on an after-tax 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 simply 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 mining 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 operating at full capacity, Bethesda Mining will need to purchase additional equipment which will cost $55 million. The equipment will be depreciated on a seven-year MACRS schedule. The contract only runs for four years. At that time the coal from the site will be entirely mined. The company feels that the equipment can be sold for 70% of its initial purchase price once mining has been completed in year 4. The contract calls for delivery of 600,000 tons of coal per year at a price of $55 per ton. Bethesda Mining feels that coal production will be 850,000 tons, 910,000 tons, 930,000 tons and 820,000 tons respectively, over the next four years. The excess production will be sold in the spot market at an average of $40 per ton. Variable costs amount to $22 per ton and fixed costs are $3.9 million per year. The mine will require an immediate investment of net working capital totaling 5% of sales; this investment will vary with sales and should be built up in the year prior to the sales. Bethesda Mining will be responsible for reclaiming the land at the termination of the mining operation. This will occur in Year 5. The company uses an outside company for reclamation of all the company's strip mines. It is estimated the cost of reclamation, $2.5 million, will be recorded as an operating expense in the year the reclamation occurs. The land will be donated to the state the year after the reclamation is completed (Year 6). This donation is necessary for the company to receive the necessary mining permits. The donation will be recorded as an operational expense of $7.5 million in the year the donation is made. Bethesda Mining has a 38% tax rate and has a 12% required return on new strip mine projects. Other important information to remember includes: Any operating loss will result in the company receiving a tax credit. The spot market price can vary by 5% of the estimate Fixed costs can vary by 5% of the estimate Variable costs can vary by 10% of the estimate The company desires a 3-year payback period The company president, Cole Hauler, has asked you to analyze this project thoroughly. This means your analysis should include: 1. The payback period, discounted payback period, profitability index, net present value, and the internal rate of return of the proposed project. 2. Sensitivity and scenario analysis of the project. 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 is sold under contract with excess production being sold in the spot, or open, market. The coal mining industry, especially high-sulfur coal operations like Bethesda, have been hard-hit by environmental regulations. Recently a combination of increased demand for coal and new pollution reduction technologies has led to 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 generators for the next four 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 $6.4 million. Based on a recent appraisal, the company feels it could receive $7.5 million on an after-tax 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 simply 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 mining 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 operating at full capacity, Bethesda Mining will need to purchase additional equipment which will cost $55 million. The equipment will be depreciated on a seven-year MACRS schedule. The contract only runs for four years. At that time the coal from the site will be entirely mined. The company feels that the equipment can be sold for 70% of its initial purchase price once mining has been completed in year 4. The contract calls for delivery of 600,000 tons of coal per year at a price of $55 per ton. Bethesda Mining feels that coal production will be 850,000 tons, 910,000 tons, 930,000 tons and 820,000 tons respectively, over the next four years. The excess production will be sold in the spot market at an average of $40 per ton. Variable costs amount to $22 per ton and fixed costs are $3.9 million per year. The mine will require an immediate investment of net working capital totaling 5% of sales; this investment will vary with sales and should be built up in the year prior to the sales. Bethesda Mining will be responsible for reclaiming the land at the termination of the mining operation. This will occur in Year 5. The company uses an outside company for reclamation of all the company's strip mines. It is estimated the cost of reclamation, $2.5 million, will be recorded as an operating expense in the year the reclamation occurs. The land will be donated to the state the year after the reclamation is completed (Year 6). This donation is necessary for the company to receive the necessary mining permits. The donation will be recorded as an operational expense of $7.5 million in the year the donation is made. Bethesda Mining has a 38% tax rate and has a 12% required return on new strip mine projects. Other important information to remember includes: Any operating loss will result in the company receiving a tax credit. The spot market price can vary by 5% of the estimate Fixed costs can vary by 5% of the estimate Variable costs can vary by 10% of the estimate The company desires a 3-year payback period The company president, Cole Hauler, has asked you to analyze this project thoroughly. This means your analysis should include: 1. The payback period, discounted payback period, profitability index, net present value, and the internal rate of return of the proposed project. 2. Sensitivity and scenario analysis of the project