Professional Documents
Culture Documents
BETHESDA MINING
The analysis of this project will require an incremental cash flow analysis of the cash
flows that are generated. The net working capital of the project is generated before the sales are
made so the cash flows are dependent on the cash outflows. The analysis will begin by the
calculation of Sales. Every year the company intends to sell 500,000 tons of coal to the parties
that it has made contracts with and sell the excess quantities produced via a spot market sale. The
total sales revenue will be calculated by adding up the total contractual sales and the spot market
sales. The sales per year are calculated as follows:
Year 1
Total Sales
Contractual Sales
Spot Sales
Contractual Sales @ $82/Ton
Spot Sales @ $76/Ton
Total Sales
Year 2
Year 3
Year 4
620,000
500,000
120,000
680,000
500,000
180,000
730,000
500,000
230,000
590,000
500,000
90,000
Year 1
$ 41,000,000
$ 9,120,000
$ 50,120,000
Year 2
$ 41,000,000
$ 13,680,000
$ 54,680,000
Year 3
$ 41,000,000
$ 17,480,000
$ 58,480,000
Year 4
$ 41,000,000
$ 6,840,000
$ 47,840,000
The after tax value of the land purchased has to be included as an opportunity cost. The initial
working capital of the project would be the net working capital as a percentage of the sales in
Year 1 as shown below:
Initial net working capital =
Initial net working capital =
5% * Year 1 Sales
$
2,506,000
$
(5,000,000)
$ (85,000,000)
$
(2,506,000)
$ (92,506,000)
BETHESDA MINING
Now with all the above calculations the Operating Cash flow per year can be calculated as
below:
Sales
VC
$31
FC
DEP
EBT
TAX
38%
N.I
+Dep
Operating Cash
Flow
Year 1
$
50,120,000
$
19,220,000
$
4,100,000
$
12,146,500
$
14,653,500
$
5,568,330
$
9,085,170
$
12,146,500
Year 2
$ 54,680,000
$ 21,080,000
$ 4,100,000
$ 20,816,500
$ 8,683,500
$ 3,299,730
$ 5,383,770
$ 20,816,500
Year 3
$ 58,480,000
$ 22,630,000
$ 4,100,000
$ 14,866,500
$ 16,883,500
$ 6,415,730
$ 10,467,770
$ 14,866,500
Year 4
$ 47,840,000
$ 18,290,000
$ 4,100,000
$ 10,616,500
$ 14,833,500
$ 5,636,730
$ 9,196,770
$ 10,616,500
Year 5
Year 6
$ 2,700,000
$ 6,000,000
$ (2,700,000)
$ 1,026,000
$ (1,674,000)
$
-
$ (6,000,000)
$ 2,280,000
$ (3,720,000)
$
-
$ 26,200,270
$ 25,334,270
$ 19,813,270
$ (1,674,000)
$ (3,720,000)
21,231,670
The years 5 and 6 can be seen of the years in which the land reclamation and charitable costs are
incurred. The cost of land reclamation in year 5 is $2.7M on which tax benefits are gained as
assumed in the case study. The charitable expense in year 6 is $6M which is equal to the salvage
value of the land.
The next step here is the calculation of the Net Working Capital required every year which is at
the beginning of every years sales. The NWC required can be calculated as follows:
Beg NWC
End NWC
NWC
Year 1
Year 2
$
2,506,000 $
2,734,000
$
2,734,000 $
2,924,000
$
(228,000) $
(190,000)
Year 3
$ 2,924,000
$ 2,392,000
$
532,000
Year 4
$ 2,392,000
$
2,392,000
The salvage value is next to be calculated in the cash flow analysis. The data given regarding the
use of the equipment in another project is irrelevant. The after tax salvage value of the equipment
should be calculated and used as the cost of the equipment for the next project. The equipment
can be kept for the other project but keeping the equipment has an opportunity cost associated
with it.
The book value of the equipment can be calculated by deducting the total depreciation of the 4
years from the cost of the equipment as follows:
Book Value of Equipment $85,000,000 - $12,146,500 - $20,816,500 - $14,866,500 =
$10,616,500
$
26,554,000
BETHESDA MINING
The market value of the equipment is 60% of its initial purchase price as follows:
Market Value of Equipment =
$85,000,000 * 60%
$
51,000,000
(7,174,000)
$
$
$
$
$
$
$
Cash Flow
(92,506,000)
21,459,670
26,390,270
25,866,270
66,031,270
(1,674,000)
(3,720,000)
2%
$5,233,207
Based on the calculations above it can be concluded that the project should be initiated because
the Net Present Value of the Project is Positive.
BETHESDA MINING
5
References
Jaffe, J., & Randolph Westerfield, R. (2004). Corporate finance. Tata McGraw-Hill Education.