EXPANSION AT EAST COAST YACHTS Because East Coast Yachts is producing at full capacity, Larissa has decided to have Dan examine the feasibl ity of a new manufacturing plant. This expansion would represent a major capital outlay for the company. A preliminary analysis of the project has been conducted at a cost of $1.2 million. This analysis determined that the new plant will require an immediate outlay of $55 million and an additional outlay of $30 million in one year. The company has received a special tax dispensation that will allow the building and equipment to be depreciated on a 20-year MACRS schedule. Because of the time necessary to build the new plant, no sales will be possible for the next year Tee years from now, the company will have partial-year sales of $18 million. Sales in the following four years wit be $27 million, $35 million, $39 million, and $43 million. Because the new plant will be more efficient than East Coast Yachts's current manufacturing facilities, variable costs are expected to be 60 percent of sales and fixed costs will be $3.5 million per year. The new plant will also require net working capital amounting to 8 percent of sales for the next year. Dan realizes that sales from the new plant will continue into the indefinite future. Because of this, he believes the cash flows after Year 5 will continue to grow at 3 percent indefinitely. The company's tax rate is 21 percent and the required return is 11 percent. Larissa would like Dan to analyze the financial viability of the new plant and calculate the profitability index NPV, and IRR. Also, Larissa has instructed Dan to disregard the value of the land that the new plant will require East Coast Yachts already owns it, and, as a practical matter, it will go unused indefinitely. She has asked Dan to discuss this issue in his report 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 environ mental 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 $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 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. As they are currently operating at full capacity, Bethesda will need to purchase additional equipment, which will cost $43 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 ca be sold for 60 percent of its initial purchase price. However, Bethesda plans to open another strip mine at th 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 $57 per ton. Bethesda Min feels that coal production will be 750,000 tons, 810,000 tons, 830,000 tons, and 720,000 tons, respectivel over the next four years. The excess production will be sold in the spot market at an average of $45 per to Variable costs amount to $16 per ton and foxed costs are $3.7 million per year. The mine will require a working capital investment of 5 percent of sales. The NWC will be built up in the year prior to the sales 2 Valuation and Capital Budgeting