I input the numbners in depreciation and contract units are correct. so disregard them.
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 been approached by Mid-Ohio Electric 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 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 $6.5 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. 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-year MACRS 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 can be sold for 60 percent of its initial purchase price in four years. However, Bethesda plans to open another strip mine at that 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 $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 $4,100,000 per year. The mine will require a net working capital investment of 5 percent of sales. The NWC will be built up in the year prior to the 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 $2.7 million. In order to get the necessary permits for the strip mine, the company agreed to donate the land after reclamation to the state for use as a public park and recreation area. This will occur in Year 6 and result in a charitable expense deduction of $6 million. Bethesda faces a 25 percent tax rate and has a 12 percent required return on new strip mine projects. Assume that a loss in any year will result in a tax credit. Page 204 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 value, and internal rate of return for the new strip mine. Should Bethesda Mining take the contract and open the mine? 1 Case Study: BETHESDA Mining Company Original Assumptions STUDENT NAME: $4,000,000 (sunk cost) $6,500,000 $95,000,000 0.60 Depreciation Schedule Year Depreciation End book value 13,575,500 81,424,500 23,265,500 58, 159,000 16,615,500 41,543,500 11,865,500 29,678,000 3 Assumptions: 4 Original land cost 5 Aftertax current land value 6 Cost of equipment 7 Salvage value of equipment at the end of year 8 Time of project in years 9 Depreciation Rates for 7-year MACRS year 1 year 2 year 3 year 4 14 Contract sales units in tons 15 Contract sales price/ton 16 Year 1 production 17 Year 2 production 18 Year 3 production 19 Year 4 production 20 Spot market sales price/ton 21 Variable cost/ton 22 Fixed cost 23 NWC percent (of next years sales!) 24 Reclamation costs in year 5) 25 Charitable expense (in year 6) 26 Tax rate 27 Required return 14.29% 24.49% 17.49% 12.49% 500,000 $86 620,000 680,000 730,000 590,000 $77.00 $31.00 $4,100,000 5.00% $2,700,000 $6,000,000 25.00% 12.00% Year 620,000 680,000 730,000 590,000 31 Sales 32 Contract Sales Units 33 Contract Sales Price/Ton 34 Total Contract Sales 35 36 Spot Market Units 37 Spot Market Sales Price/Ton 38 Total Spot Market Sales 39 Total Sales 620,000 680,000 730,000 590,000 Sales Contract Sales Units Contract Sales Price/Ton Total Contract Sales Spot Market Units Spot Market Sales Price/Ton Total Spot Market Sales Total Sales - Variable Cost - Fixed Cost - Reclamation Costs (in year 5) - Depreciation EBIT -Taxes (here, also include the charitable expense deduction in year 6) Net Income OCF (= EBIT +dep-tax or NI + dep) Year NWC change in NWC Year CF from Assets: OCF -Change in NWC -Capital Spending (Equipment) -Capital Spending (Land) CF from Assets Year Cumulative CF Payback PI NPV IRR MIRR 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 been approached by Mid-Ohio Electric 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 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 $6.5 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. 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-year MACRS 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 can be sold for 60 percent of its initial purchase price in four years. However, Bethesda plans to open another strip mine at that 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 $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 $4,100,000 per year. The mine will require a net working capital investment of 5 percent of sales. The NWC will be built up in the year prior to the 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 $2.7 million. In order to get the necessary permits for the strip mine, the company agreed to donate the land after reclamation to the state for use as a public park and recreation area. This will occur in Year 6 and result in a charitable expense deduction of $6 million. Bethesda faces a 25 percent tax rate and has a 12 percent required return on new strip mine projects. Assume that a loss in any year will result in a tax credit. Page 204 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 value, and internal rate of return for the new strip mine. Should Bethesda Mining take the contract and open the mine? 1 Case Study: BETHESDA Mining Company Original Assumptions STUDENT NAME: $4,000,000 (sunk cost) $6,500,000 $95,000,000 0.60 Depreciation Schedule Year Depreciation End book value 13,575,500 81,424,500 23,265,500 58, 159,000 16,615,500 41,543,500 11,865,500 29,678,000 3 Assumptions: 4 Original land cost 5 Aftertax current land value 6 Cost of equipment 7 Salvage value of equipment at the end of year 8 Time of project in years 9 Depreciation Rates for 7-year MACRS year 1 year 2 year 3 year 4 14 Contract sales units in tons 15 Contract sales price/ton 16 Year 1 production 17 Year 2 production 18 Year 3 production 19 Year 4 production 20 Spot market sales price/ton 21 Variable cost/ton 22 Fixed cost 23 NWC percent (of next years sales!) 24 Reclamation costs in year 5) 25 Charitable expense (in year 6) 26 Tax rate 27 Required return 14.29% 24.49% 17.49% 12.49% 500,000 $86 620,000 680,000 730,000 590,000 $77.00 $31.00 $4,100,000 5.00% $2,700,000 $6,000,000 25.00% 12.00% Year 620,000 680,000 730,000 590,000 31 Sales 32 Contract Sales Units 33 Contract Sales Price/Ton 34 Total Contract Sales 35 36 Spot Market Units 37 Spot Market Sales Price/Ton 38 Total Spot Market Sales 39 Total Sales 620,000 680,000 730,000 590,000 Sales Contract Sales Units Contract Sales Price/Ton Total Contract Sales Spot Market Units Spot Market Sales Price/Ton Total Spot Market Sales Total Sales - Variable Cost - Fixed Cost - Reclamation Costs (in year 5) - Depreciation EBIT -Taxes (here, also include the charitable expense deduction in year 6) Net Income OCF (= EBIT +dep-tax or NI + dep) Year NWC change in NWC Year CF from Assets: OCF -Change in NWC -Capital Spending (Equipment) -Capital Spending (Land) CF from Assets Year Cumulative CF Payback PI NPV IRR MIRR
