Running Head: BETHESDA MINING COMPANY

Bethesda Mining Company

Elijah Clark
Walden University

BETHESDA MINING COMPANY

Bethesda Mining Company

Bethesda is a coal mining company that has been affected by environmental regulations.
Growing demands for coal and pollution reduction technologies have created a market demand
for high-sulfur coal (Ross, Westerfield, & Jaffe, 2013). To fulfill a potential purchase order,
Bethesda is considering opening a new location. The companys management is trying to
determine if there is value in taking the contract and opening the new location.
Assignment Questions
The Bethesda Mining mini case ask to provide calculation of the payback period,
profitability index, net present value, and internal rate of return for the new strip mine.
Financial Figures.
The focus is to determine the value of the project by calculating sales based on the
company delivering contracts of 500,000 tons for four years, in addition to the excess on the spot
market. The yearly sales totals are calculated as price per ton under contract, times 500,000 tons,
plus the spot market sales times the spot market price.
Considering the price per ton is $82 million, the calculation is $82 times 500,000 tons,
which totals to $41,000,000 tons per year that will be sold under contract.
Spot Value
The projected coal production over the next four years is 620,000 tons, 680,000 tons,
730,000 tons, and 590,000 tons. Subtracting the coal production estimate from the contracted
tons, and multiplying the total by the spot market excess value of $76 per ton, totals the spot
value. The calculation for year one is:
Spot=(620,000 tons500,000 tons) $ 76

(0)

The total sales are the contract values plus the spot values. Table 1 showcases the total for
the next four years.

BETHESDA MINING COMPANY

Table 1
Total sales for the next four years
Year 1
Contract
$41,000,000
Spot
$9,120,000
Total Sales $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

Cash Flow
The initial net working capital (NWC) per year is needed to find the total cash flow. The
formula to find the NWC is:
(0)

NWC =Sales tax(Total value of tons)

Using the formula, the NWC calculation for year one is:
.05($50,120,000) = $2,506,000.

To find the current cash flow today, add the provided equipment cost of 85 million, the
land cost of 5.5 million, and the NWC, which totals to -$93,006,000.
Net Working Capital Cash Flow
The net working capital cash flow (NWC CF) is determined by the value of 5 percent of
next years sales. Using this formula, the yearly NWC CF is:
Table 2
Yearly net working capital cash flows

Starting
Ending
NWC cash flow

Book Value

Year 1
$2,506,000
2,734,000
$228,000

Year 2
$2,734,000
2,924,000
$190,000

Year 3
$2,924,000
2,392,000
$532,000

Year 4
$2,392,000
0
$2,392,000

BETHESDA MINING COMPANY

The book value is the total equipment value minus the depreciation value. The
accumulated depreciated value can be found by looking into the modified accelerated cost
recovery systems (MACRS) depreciation schedule, which is:
Table 3
MACRS yearly depreciation values
Year
Depreciation
1
14.29%
2
24.29%
3
17.49%
4
12.49%
Based on the MACRS schedule and a contract and salvage rate of 4 years, the
depreciation values are shown within Table 4.
Table 4
Yearly sales, variable cost, fixed cost, and depreciation values
Year 1
$50,120,00

Year 2
$54,680,00

Year 3
$58,480,00

Year 4
$47,840,00

Sales
Variable
Fixed
Depreciatio

0
19,220,000
4,100,000

0
21,080,000
4,100,000

0
22,630,000
4,100,000

0
18,290,000
4,100,000

12,146,500

20,816,500

14,866,500

10,616,500

Year 5

$2,700,000

The variable cost is the total projected coal production times $31 per ton. The fixed cost
is provided as totaling $4,100,000 per year.
Considering the original equipment cost is $85 million, the formula used to find the book
value is:
Book Value=$ 85,000,000 12,146,500 20,816,500 14,866,500 10,616,500
The book value total to $26,554,000
Next, the net cash flow is needed. The calculation to find the net cash flow is:

(0)

BETHESDA MINING COMPANY

NWC =OCF+ NWC CF +Salvage Value

(0)

To determine the operating cash flow (OCF), the earnings before tax (EBT) need to be
determined. The EBT is calculated as sale minus variable cost, minus fixed cost, minus
depreciation. The EBT results are:
Table 5
Earning before taxes total
Year 1
$50,120,00

Year 2
$54,680,00

Year 3
$58,480,00

Year 4
$47,840,00

Sales
Variable
Fixed
Depreciatio

0
19,220,000
4,100,000

0
21,080,000
4,100,000

0
22,630,000
4,100,000

0
18,290,000
4,100,000

$2,700,000

12,146,500
$14,653,50

20,816,500

14,866,500
$16,883,50

10,616,500
$14,833,50

$8,683,500

$2,700,000

EBT

Year 5

The total of EBT minus 38 percent tax rate as shown in Table 6 is used to find the OCF.
The OCF is the sum of the EBT minus the tax rate, plus the positive depreciation value.
Table 6
Total sales for the next four years
Year 1
$14,653,50

Year 2

Year 3

Year 4
$14,833,50

Year 5

Year 6

EBT
Tax
Total
Dep+

0
5,568,330
$9,085,170
12,146,500
$21,231,67

$8,683,500 $16,883,500
3,299,730
6,415,730
$5,383,770 $10,467,770
20,816,500 14,866,500
$26,200,27

0
5,636,730
$9,196,770
10,616,500
$19,813,27

$2,700,000
1,026,000
$1,674,000
0

2,280,000
$2,280,000
0

OCF

0 $25,334,270

$1,674,000

$2,280,000

Salvage Value

BETHESDA MINING COMPANY

The salvage value is the equipment value of $51 million, minus the equipment sales tax
value. The sales tax value is the book value minus the equipment value total, times the tax value.
The calculation is presented as:
Equipment sa les taxes=( $ 26,554,000 51,000,000)(.38)= $ 9,829,480
Salvage value = $51,000,000 9,829,480
Total salvage value = $41,710,520
Net Cash Flow
The table below shows the total of net cash flows, operating cash flow, net working
capital, and salvage value.

Table 7
Net cash flow values
Year
Cash flow value
0
$93,006,000
1
21,003,670
2
26,010,270
3
25,866,270
4
63,915,790
5
1,674,000
6
2,280,000
Based on the cash flows for the next six years, the NPV totals to $5,718,491.29, as
determined by the yearly discounted cash flow. The calculation to determine the NPV is:
Table 8

(0)

BETHESDA MINING COMPANY

Net present value formula

Year
Cash flows
0
$93,006,000
1
21,003,670/1.121
2
26,010,270/1.122
3
25,866,270/1.123
4
63,915,790/1.124
5
1,674,00/1.125
6
2,280,000/1.126
The profitability index is 1.0615. Based on total values in Table 9 divided by the total cash
flow of $93,006,000.
Table 9
Profitability index formula
Year
Cash flows
1
21,003,670/1.121
2
26,010,270/1.122
3
25,866,270/1.123
4
63,915,790/1.124
5
1,674,00/1.125
6
2,280,000/1.126
The internal rate of return (IRR) for the project is 14.39% and calculated in Table 10 and as
$0 = total yearly cash flows:
Table 10
Internal rate of return formula
Year
0
1
2
3
4
5
6
Recommendation

Cash flows
$93,006,000(1 + IRR)
21,003,670/(1 + IRR)1
26,010,270/(1 + IRR)2
25,866,270/(1 + IRR)3
63,915,790/(1 + IRR)4
1,674,00/(1 + IRR)5
2,280,000/(1 + IRR)6

BETHESDA MINING COMPANY

Based on these results and because the NPV is positive, it is recommended that the
company accept this project.
Reference
Ross, S. A., Westerfield, R. W., & Jaffe, J. (2013). Corporate finance (10th ed.). New York:
McGraw-Hill Irwin.