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BETHESDA MINING COMPANY Bethesda Mining is a midsized coal mining company with 20 mines located in Ohio. Pensylvania West Virgin and Komlucky. The company operates deep mines as well as strip mines. Most of the coal mined is sold decorat with excess peoduction sold on the spot market. The coal mining industry, especially high-sulfurcaal operates such as Bethesda, has been hard-hit by avem regulations. Recently, however, a combination of increased demand for cool and new pollution reduction technologies has led to an imposed met demand for highercoal Bethesda has just been approached by Elect Company with a request to supply coal for its clectric generators for the next four years. Bethesda Medo have enough excess capacity at its existing mines to garantee the contract. The company is considering opening a strip mine in Ohio on 5.000 seres of land purchased 10 years ago for 54 million. Based on a recent pilte company feels it could receive 57 million on an aller best sold the land today Strip mining is a process where the layers of top above a cual 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 regulatice how force a company to reclaim the land that is when the mining in complied, and the restored to merits original condition. The land can then be used for other purposes se pergraph the below for further information regarding the land reclamatical Became it is currently operating full capacity, Bethesda will need to purchase additional necessary in which will cost $64 million. The equipment will be depreciated on a four-year strailinchedule. The centrum for only four years. At that time the coal from the site will be entirely mined. The company feels that the one will be worthless at the end of the contractie a market calage value of 2010) The comtract calls for the delivery of 500,000 sm of coal per yeast price of $0 per toeBethesde Mim Seeds that coal production will be 600.000 tons. 700,000 ton. 700,000 tons, and 630.000 tons, respectively over the next four years. The excew productive will be sold in the spot market at an average of 75 perton. Variable to $29 perton, and fixed costs are 54.000.000 per year. The mine will require a networking capital (WC) imestment of percent of sales. The NWC will be built up in the year prior to the sales fue of next year sales Bethesda will be responsible for reclaiming the land termination of the mining. This will occur in Year 5. The company was an outside company for reclamation of all the company's mines. It is estimated to of reclamation will be 52.5 million Bethesda faces a 28 percent tax rate and has a 125 percent required strip mine projects. Assume that a low in any year will instax credit You have been approached by the president of the company with a request to analyze the project. Calculate present values, and internal rate of return for the new strip mine. Should Bethesda Mining take the contract and open the mine Notes for solution 1. Opportunity costs at time, the company estimates that it can sell the land for 1 million atletas bus that the land has no value at the end of the project. Ale, land has a depreciation based on a 2. Project termination - year is relevant although the productions at the end of year 4. Remember to take inte account year 5 reclamation cost. Assume that the firm is profitable and can use this expense to roduce the tax paymcat 3. Points Sales 20 point b Cos 30 points Cash flow adjustments 10 points d. NPV and IRR 20 points BETHESDA MINING COMPANY Bethesda Mining is a midsized coal mining company with 20 mines located in Ohio. Pensylvania 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 hand-hot 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 just been approached by Mid- Oos Electric Company with a request to supply coal for its clectric generators for the next four years. Bethesda Mining does 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 S4 million. Based on a recent appraisal, the company feels it could receive 57 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 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 the mining is completed the land must be restored to near its original condition. The land can then be used for other purposes (see paragraphe three below for further information regarding the land reclamation). Because it is currently operating at full capacity, Bethesda will need to purchase additional necessary equipment which will cost $64 million. The equipment will be depreciated on a four-year strait line 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 will be worthless at the end of the contract (i.c., a market salvage value of zero). The contract calls for the delivery of 500,000 tons of coal per year at a price of $80 per ton Bethesda Mining feels that coal production will be 600.000 tons, 700,000 tons, 700,000 tons, and 620.000 tons, respectively over the next four years. The excess production will be sold in the spot market at an average of 75 per fon Variable costs amount to $29 per ton, and fixed costs are $4,000,000 per year. The mine will require a networking capital (NWC) investment of 5 percent of sales. The NWC will be built up in the year prior to the sales (ie. 5% of next year 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 company's strip mines. It is estimated the cost of reclamation will be $2.5 million Bethesda faces a 28 percent tax rate and has a 12.5 percent required to strip mine projects. Assume that 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 net present value and internal rate of retum for the new strip mine. Should Bethesda Mining take the contract and open the mine? Notes for solution: 1. Opportunity costs at time, the company estimates that it can sell the land for $7 million aftertas basis. Assume that the land has no value at the end of the project. Also, land has no depreciation based on IRS rules 2. Project termination-year 5 is relevant although the production ends at the end of year 4. Remember to take into account year-S reclamation cost. Assume that the firm is profitable and can use this expense to reduce the tax payment BETHESDA MINING COMPANY 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 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 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 $4 million. Based on a recent appraisal, the company feels it could receive $7 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 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 the mining is completed, the land must be restored to near its original condition. The land can then be used for other purposes (see paragraph three below for further information regarding the land reclamation). Because it is currently operating at full capacity, Bethesda will need to purchase additional necessary equipment, which will cost $64 million. The equipment will be depreciated on a four-year strait line 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 will be worthless at the end of the contract (i.e., a market salvage value of zero). The contract calls for the delivery of 500,000 tons of coal per year at a price of $80 per ton. Bethesda Mining feels that coal production will be 600,000 tons, 700,000 tons, 700,000 tons, and 620,000 tons, respectively, over the next four years. The excess production will be sold in the spot market at an average of 75 per ton. Variable costs amount to $29 per ton, and fixed costs are $4,000,000 per year. The mine will require a networking capital (NWC) investment of 5 percent of sales. The NWC will be built up in the year prior to the sales (.e.5% of next year 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 company's strip mines. It is estimated the cost of reclamation will be $2.5 million. Bethesda faces a 28 percent tax rate and has a 12.5 percent required return on new strip mine projects. Assume that 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 net present value, and internal rate of return for the new strip mine. Should Bethesda Mining take the contract and open the mine? Notes for solution: 1. Opportunity costs: at time 0, the company estimates that it can sell the land for $7 million aftertax basis. Assume that the land has no value at the end of the project. Also, land has no depreciation based on IRS rules. 2. Project termination - year 5 is relevant although the production ends at the end of year 4. Remember to take into account year-5 reclamation cost. Assume that the firm is profitable and can use this expense to reduce the tax payment BETHESDA MINING COMPANY Bethesda Mining is a midsized coal mining company with 20 mines located in Ohio. Pensylvania West Virgin and Komlucky. The company operates deep mines as well as strip mines. Most of the coal mined is sold decorat with excess peoduction sold on the spot market. The coal mining industry, especially high-sulfurcaal operates such as Bethesda, has been hard-hit by avem regulations. Recently, however, a combination of increased demand for cool and new pollution reduction technologies has led to an imposed met demand for highercoal Bethesda has just been approached by Elect Company with a request to supply coal for its clectric generators for the next four years. Bethesda Medo have enough excess capacity at its existing mines to garantee the contract. The company is considering opening a strip mine in Ohio on 5.000 seres of land purchased 10 years ago for 54 million. Based on a recent pilte company feels it could receive 57 million on an aller best sold the land today Strip mining is a process where the layers of top above a cual 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 regulatice how force a company to reclaim the land that is when the mining in complied, and the restored to merits original condition. The land can then be used for other purposes se pergraph the below for further information regarding the land reclamatical Became it is currently operating full capacity, Bethesda will need to purchase additional necessary in which will cost $64 million. The equipment will be depreciated on a four-year strailinchedule. The centrum for only four years. At that time the coal from the site will be entirely mined. The company feels that the one will be worthless at the end of the contractie a market calage value of 2010) The comtract calls for the delivery of 500,000 sm of coal per yeast price of $0 per toeBethesde Mim Seeds that coal production will be 600.000 tons. 700,000 ton. 700,000 tons, and 630.000 tons, respectively over the next four years. The excew productive will be sold in the spot market at an average of 75 perton. Variable to $29 perton, and fixed costs are 54.000.000 per year. The mine will require a networking capital (WC) imestment of percent of sales. The NWC will be built up in the year prior to the sales fue of next year sales Bethesda will be responsible for reclaiming the land termination of the mining. This will occur in Year 5. The company was an outside company for reclamation of all the company's mines. It is estimated to of reclamation will be 52.5 million Bethesda faces a 28 percent tax rate and has a 125 percent required strip mine projects. Assume that a low in any year will instax credit You have been approached by the president of the company with a request to analyze the project. Calculate present values, and internal rate of return for the new strip mine. Should Bethesda Mining take the contract and open the mine Notes for solution 1. Opportunity costs at time, the company estimates that it can sell the land for 1 million atletas bus that the land has no value at the end of the project. Ale, land has a depreciation based on a 2. Project termination - year is relevant although the productions at the end of year 4. Remember to take inte account year 5 reclamation cost. Assume that the firm is profitable and can use this expense to roduce the tax paymcat 3. Points Sales 20 point b Cos 30 points Cash flow adjustments 10 points d. NPV and IRR 20 points BETHESDA MINING COMPANY Bethesda Mining is a midsized coal mining company with 20 mines located in Ohio. Pensylvania 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 hand-hot 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 just been approached by Mid- Oos Electric Company with a request to supply coal for its clectric generators for the next four years. Bethesda Mining does 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 S4 million. Based on a recent appraisal, the company feels it could receive 57 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 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 the mining is completed the land must be restored to near its original condition. The land can then be used for other purposes (see paragraphe three below for further information regarding the land reclamation). Because it is currently operating at full capacity, Bethesda will need to purchase additional necessary equipment which will cost $64 million. The equipment will be depreciated on a four-year strait line 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 will be worthless at the end of the contract (i.c., a market salvage value of zero). The contract calls for the delivery of 500,000 tons of coal per year at a price of $80 per ton Bethesda Mining feels that coal production will be 600.000 tons, 700,000 tons, 700,000 tons, and 620.000 tons, respectively over the next four years. The excess production will be sold in the spot market at an average of 75 per fon Variable costs amount to $29 per ton, and fixed costs are $4,000,000 per year. The mine will require a networking capital (NWC) investment of 5 percent of sales. The NWC will be built up in the year prior to the sales (ie. 5% of next year 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 company's strip mines. It is estimated the cost of reclamation will be $2.5 million Bethesda faces a 28 percent tax rate and has a 12.5 percent required to strip mine projects. Assume that 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 net present value and internal rate of retum for the new strip mine. Should Bethesda Mining take the contract and open the mine? Notes for solution: 1. Opportunity costs at time, the company estimates that it can sell the land for $7 million aftertas basis. Assume that the land has no value at the end of the project. Also, land has no depreciation based on IRS rules 2. Project termination-year 5 is relevant although the production ends at the end of year 4. Remember to take into account year-S reclamation cost. Assume that the firm is profitable and can use this expense to reduce the tax payment BETHESDA MINING COMPANY 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 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 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 $4 million. Based on a recent appraisal, the company feels it could receive $7 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 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 the mining is completed, the land must be restored to near its original condition. The land can then be used for other purposes (see paragraph three below for further information regarding the land reclamation). Because it is currently operating at full capacity, Bethesda will need to purchase additional necessary equipment, which will cost $64 million. The equipment will be depreciated on a four-year strait line 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 will be worthless at the end of the contract (i.e., a market salvage value of zero). The contract calls for the delivery of 500,000 tons of coal per year at a price of $80 per ton. Bethesda Mining feels that coal production will be 600,000 tons, 700,000 tons, 700,000 tons, and 620,000 tons, respectively, over the next four years. The excess production will be sold in the spot market at an average of 75 per ton. Variable costs amount to $29 per ton, and fixed costs are $4,000,000 per year. The mine will require a networking capital (NWC) investment of 5 percent of sales. The NWC will be built up in the year prior to the sales (.e.5% of next year 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 company's strip mines. It is estimated the cost of reclamation will be $2.5 million. Bethesda faces a 28 percent tax rate and has a 12.5 percent required return on new strip mine projects. Assume that 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 net present value, and internal rate of return for the new strip mine. Should Bethesda Mining take the contract and open the mine? Notes for solution: 1. Opportunity costs: at time 0, the company estimates that it can sell the land for $7 million aftertax basis. Assume that the land has no value at the end of the project. Also, land has no depreciation based on IRS rules. 2. Project termination - year 5 is relevant although the production ends at the end of year 4. Remember to take into account year-5 reclamation cost. Assume that the firm is profitable and can use this expense to reduce the tax payment