Bethesda Mining Company

CHAPTER 7, Case #1 BETHESDA MINING To analyze this project, we must calculate the incremental cash flows generated by the project. Since net working capital is built up ahead of sales, the initial cash flow depends in part on this cash outflow. So, we will begin by calculating sales. Each year, the company will sell 600,000 tons under contract, and the rest on the spot market. The total sales revenue is the price per ton under contract times 600,000 tons, plus the spot market sales times the spot market price. The sales per year will be: Year 1 Year 2 Year 3 Year 4 Contract $20,400,000 $20,400,000 $20,400,000 $20,400,000 Spot 2,000,000 5,000,000 8,400,000 5,600,000 Total $22,400,000 $25,400,000 $28,800,000 $26,000,000 The current aftertax value of the land is an opportunity cost. The initial outlay for net working capital is the percentage required net working capital times Year 1 sales, or: Initial net working capital = .05($22,400,000) = $1,120,000 So, the cash flow today is: Equipment –$30,000,000 Land –5,000,000 NWC –1,120,000 Total –$36,120,000 Now we can calculate the OCF each year. The OCF is: Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Sales $22,400,000 $25,400,000 $28,800,000 $26,000,000 Var. costs 8,450,000 9,425,000 10,530,000 9,620,000 Fixed costs 2,500,000 2,500,000 2,500,000 2,500,000 $4,000,000 $6,000,000 Dep. 4,290,000 7,350,000 5,250,000 3,750,000 EBT $7,160,000 $6,125,000 $10,520,000 $10,130,000 –$4,000,000 –$6,000,000 Tax 2,720,800 2,327,500 3,997,600 3,849,400 –1,520,000 –2,280,000 Net income $4,439,200 $3,797,500 $6,522,400 $6,280,600 –$2,480,000 –$3,720,000 + Dep. 4,290,000 7,350,000 5,250,000 3,750,000 OCF $8,729,200 $11,147,500 $11,772,400 $10,030,600 –$2,480,000 –$3,720,000
CHAPTER 7 CASE #1 C-21 Years 5 and 6 are of particular interest. Year 5 has an expense of $4 million to reclaim the land, and it is the only expense for the year. Taxes that year are a credit, an