Shelie,

I have an additional two questions - Nos. 2 & 3 in the attached assignment I could use your help on. These questions are listed near the end of the case assignment.

Thank you.

FIN526 Problems in Financial Management Bethesda Mining Company Case Study Overview 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 $6 million. Based on a recent appraisal, the company feels it could receive $7 million on an after-tax 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. Because it is currently operating at full capacity, Bethesda will need to purchase additional necessary equipment, which will cost $85 million. The equipment will be depreciated on a seven-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 $95 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 $90 per ton. Variable costs amount to $31 per ton, and fixed costs are $4,300,000 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 $2.8 million. After the land is reclaimed, the company plans to donate the land 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 $7.5 million. Bethesda faces a 38 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. You have been approached by the president of the company with a request to analyze the project. Calculate the payback period, profitability index, average accounting return, net present value, internal rate of return, and modified internal rate of return for the new strip mine. Should Bethesda Mining take the contract and open the mine? GUIDELINES FOR ANALYSIS This is a group case project and each group member is expected to fully participate in the analysis. The following aids are permitted: You may your textbook, all posted materials (including Discussion Board Q&A), and your notes. Any other aids are unauthorized and their use constitutes a violation of academic integrity. This includes face-to-face or electronic correspondence concerning the specific details of the case with any other person or entity outside of your group, whether or not they have current or past affiliation with Washington State University. The case analysis is due on the date indicated on the course schedule. Late papers may be accepted with a reasonable excuse, but will be assessed a 20% grade reduction penalty. The case report should be written according to the following format: 1. Introduction 2. Analysis 3. Conclusion The introduction sets the stage for the work to follow and should consist of a short paragraph of the key problem(s) or issue(s) that your analysis addresses. The analysis will constitute the bulk of the written presentation and will be a direct response to the questions below. Use clear, concise, and complete sentences. Do not use bullet points or numbered paragraphs. The conclusion should be a short paragraph that summarizes the key points of the analysis. Your report should not exceed five pages of double-spaced text with 1 inch margins at the sides, top, and bottom of the page. This does not include exhibits of your computations. You may submit one Excel Spreadsheet that contains all your exhibits, clearly labeled, and appropriately referenced in the text of your report. Your analysis should include answers to the questions below. Do not write the questions verbatim in your report. Instead, write a brief introductory statement that summarizes the question before you proceed with your analysis. Note that both the $2.8 million reclamation cost and the $7.5 million charitable expense recognition are deductible for tax purposes. You should assume that Bethesda has sufficient taxable income to immediately recognize these tax deductions. 1. Compute the payback period, profitability index, net present value, internal rate of return, and modified internal rate of return for the new strip mine. Use the template provided for your calculations, but be sure to include a discussion of your computations in the text of your report and provide additional exhibits if necessary to show any additional computations. 2. How would you make a decision using the payback period? What conceptual and practical difficulties would you encounter? Would discounted payback alleviate these concerns? Explain why or why not. 3. Is the profitability index useful in this case? Explain why or why not. 4. Explain the meaning of the IRR. Why is a modified IRR potentially useful? What is your recommendation concerning the new mine using IRR or MIRR? 5. Explain the meaning of the NPV. What is your recommendation using NPV? Does it align with your decision using IRR? Under what conditions might your recommendation using NPV differ from your recommendation using IRR