Question
Morgantown Mining Company is considering a new mining method at its Blacksville mine. The method, called longwall mining, is carried out by a robot. Coal
Morgantown Mining Company is considering a new mining method at its Blacksville mine. The method, called longwall mining, is carried out by a robot. Coal is removed by the robot, not by tunneling like a worm through an apple, which leaves more of the target coal than is removed, but rather by methodically shuttling back and forth across the width of the deposit and devouring nearly everything. The method can extract about 75% of the available coal, compared with 50% for conventional mining, which is largely done with machines that dig tunnels. Moreover, the coal can be recovered far more inexpensively. Currently, at Blacksville alone, the company mines 5 million tonnes a year with 2200 workers. By installing two longwall robot machines, the company can mine 5 million tonnes with only 860 workers. (A robot miner can dig more than 6 tonnes of coal every minute.) Despite the loss of employment, the United Mine Workers union generally favors longwall mines for two reasons: The union officials are quoted as saying, (1) It would be far better to have highly productive operations that were able to pay our folks good wages and benefits than to have 2200 shovelers living in poverty, and (2) Longwall mines are inherently safer in their design. The company projects the following financial data upon installation of the longwall mining:
Robot installation (2 units) | $9.3 million |
Total amount of usable coal deposit | 50 million tones |
Annual mining capacity | 5 million tones |
Project life | 10 years |
Estimated salvage value | $0.5 million |
Working capital requirement | $2.5 million |
Expected additional revenues: Labor savings Accident prevention Productivity gain |
$6.5 million $0.5 million $2.5 million |
Expected additional costs: O&M costs |
$2.4 million |
The firms marginal tax rate is 40%. Estimate the firms net after-tax cash flows, if the CCA rate for the robots is 30%. Find the PE value with MARR = 15%.
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