Remark: all the dollar value below should be considered fair (true) market values i.e., any prospective buyer/seller would gladly pay them You are working for the finance department of a successful, very profitable, coal mining company. You are in charge of evaluating the following big surface mining campaign in the State of Kentucky. In order to be allowed to gain access to all the financial numbers necessary for your analysis of the prospective project, you will have to pay one-time tax-deductible charge of $1 million to the State of Kentucky at the end of year 1: - For the following 8 years, you consider mining coal from a piece of land owned the State of Kentucky. The piece of land is currently valued at $500 million. However, if you decide to start the project, the State is willing to donate the land for your project. The State will require you to (a) return the land free of charge after coal mining is completed, as well as to (b) pay environmental restoration (tax-deductible) costs. The restoration costs are estimated to be $30 million to be paid in Year 3, $10 million to be paid in year 6 and $125 million to be paid in Year 9 (the first year after all mining activities are to be completed). All restoration costs are to be paid in cash to an external contractor. - The coal production is estimated to be 3.5 million tons in years 1-4, 1 million tons in years 5 and 6, 0.75 million tons in years 7 and 8. The price is expected to be $125 per ton at T=1. The price is expected to increase by 2% per year thereafter. Variable costs are expected to be $50 per ton every year, and fixed production costs are $120 mil every year. - The mining equipment which your company already owns (so nothing has to be paid in cash) has an estimated value of $190 mil. If you feel depreciation charges should be calculated, assume the equipment would be subject to straight-line depreciation over 10 years (note: even though mining takes only 8 years, it is very well possible that the time of depreciation may be completely different from the maturity of the project.) It is estimated that the equipment can be sold for a (salvage) value of 50% of the original value once mining activities are completed (T=8). - The necessary initial NWC investment will be $20 mil at T=0, and NWC *levels* are expected to increase by 10% per year thereafter, until coal mining is completed (T=8). The project should have NO cash flows related to NWC after year 8. - The tax rate is 21% and the required rate of return is 13%. A) If the company decides to undertake the project, what are the levels of total free cash flows associated with the projects in years 0 through 9? [Hints: (1) If you want to receive any credit, you have to present the full valuation of FCF (all steps) not just the final FCF numerical values. (2) Tax on negative income is a POSITIVE CASH INFLOW (because it allows shielding profits from other companys projects from taxation).] B) If NPV rule is applicable, what is the NPV of the project? C) If IRR rule is applicable, then what is the IRR of the project? D) Ultimately, should the company undertake this project? E) Assume a little different scenario - Assume that you have to pay the $190 million worth of mining equipment in CASH. How much will the NPV of the project change under these new circumstances? Should your company undertake the project in this case? Why or why not? F) Go back to the original project you analyzed in parts A through D. Consider this scenario: IF the company decides to pursue the new mining project, the extra experience gained in running the Kentucky project will allow the company to become more efficient in running projects in other states. You estimate that your company will gain $3 million worth of the (total) FCFs per year for years 1 through 8 due to improved efficiency of other projects. Are these considerations even relevant for your Kentucky project? Should the company undertake the project in this case? Why or why not