Coal Mining Case Study



Bethesda Mining Company Case Study

Introduction

In order to analysis the project viability, it is necessary analyze the project with investment techniques. These techniques are helpful when making decision. Project evaluation is important so that it can reduce the risk of losses that might experience by the company. Evaluation lights the factors which might not be favorable in future. This paper will focuses on the Bethesda Mining Company Case Study in order to analyze the project in terms of 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.

Analysis

As the net working capital constructed ahead of the sales, initial cash-flows depend on the cash outflows which will be obtain through sales figure calculation. Bethesda Mining will sell 500,000 tons of coal per year at a price of $95 per ton and other spot market.

The following is the data on the bases of the entire calculation is determined:

Bethesda Mining Company

Cost of Equipment

$ 85, 000, 000

 

Depreciation Base

MACRS 7 Years

 

Time of the contract

4

Years

 

Salvage Value at the end of 4 years

$ 51, 000, 000

 

Annual Amount of Coal

500, 000

Tons

 

Price per Ton

$ 95

 

Annual Sales (Under Contract)

$ 47, 500, 000

 

Opportunity Cost of Land Value

$ 7, 000, 000

 

 

Year

 

1

2

3

4

Forecasted Production

620, 000

680, 000

730, 000

590, 000

Excess Production

120, 000

180, 000

230, 000

90, 000

Price per Ton of Excess Production

$ 90

 

Annual Revenue from Excess Production

$ 10, 800, 000

$ 16, 200, 000

$ 20, 700, 000

$ 8, 100, 000

Total Annual Revenues:

 

 

Year

 

1

2

3

4

Annual Revenue

$ 58, 300, 000

$ 63, 700, 000

$ 68, 200, 000

$ 55, 600, 000

 

 

Variable Costs

$ 31

per Ton

 

Fixed Costs

$ 4, 300, 000

per Year

 

Initial NWC (5% of Sales)

$ 2, 915, 000

 

Cost of Reclaiming the Land

$ 2, 800, 000

Year 5

 

Charitable Expense Reduction

$ 7, 500, 000

Year 6

 

Tax Rate

38%

 

Required Return

12%

 

 

 



Sales per Year

Sales per year have been calculated by adding annual; sales with yearly revenue from excess Production.

 

Year

 

1

2

3

4

Contract

$ 47, 500, 000

$ 47, 500, 000

$ 47, 500, 000

$ 47, 500, 000

Spot

$ 10, 800, 000

$ 16, 200, 000

$ 20, 700, 000

$ 8, 100, 000

Total

$ 58, 300, 000

$ 63, 700, 000

$ 68, 200, 000

$ 55, 600, 000

An opportunity cost is the current after tax value of the land. The initial out flow of net working capital is the % which is required for net working capital in year 1 sales.

Initial Net-working capital: 0.05 ($ 58, 300, 000) : $2, 915, 000

Hence, today cash flow would be:

Equipment: $ 85, 000, 000

Land: $ 7, 000, 000

Net Working Capital: $ 2, 915, 000

Total: $ 94915000

1) MACRS Depreciation Schedule

Year

Depreciable Cost

Depreciation Rate

Annual Depreciation

Accumulated Depreciation

Book Value

1

$ 85, 000, 000

14.30%

$ 12, 155, 000

$ 12, 155, 000

$ 72, 845, 000

2

$ 85, 000, 000

24.50%

$ 20, 825, 000

$ 32, 980, 000

$ 52, 020, 000

3

$ 85, 000, 000 ...