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Running Head: BETHESDA MINING

Bethesda Mining Case Study


(Name of Writer)
(Name of Institute)

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

The Cash Flow can be calculated as:


Land
Equipment
Net Working Capital
Total

$
(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

Tax on sale of Equipment can be calculated as below:


Tax on sale of equipment = ($26,554,000 - $51,000,000*38%)
Tax on sale of Equipment =

(7,174,000)

After Tax Salvage value of the Equipment = ($51,000,000 $7,174,000)


After Tax Salvage value of the Equipment = $43,826,000
The net cash flows for the period of six years are as follows:
Years
0
1
2
3
4
5
6

$
$
$
$
$
$
$

Cash Flow
(92,506,000)
21,459,670
26,390,270
25,866,270
66,031,270
(1,674,000)
(3,720,000)

The Payback Period of the Project can be calculated as = 3 + $18,789,790/$66,031,270


The Payback Period of the Project = 3.28 years
Profitability Index = Total Present value of Cash Flows/Initial Investment
Profitability index = $5,233,207/$92,506,000
Profitability index = 0.0566
IRR =
NPV =

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

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References

Jaffe, J., & Randolph Westerfield, R. (2004). Corporate finance. Tata McGraw-Hill Education.

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