BETHESDA MINING CASE STUDY

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CHAPTER 6, 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 500,000 tons under contract, and the rest on the spot market. The total sales revenue is the price per ton under contract times 500,000 tons, plus the spot market sales times the spot market price. The sales per year will be: Year 1

$47,500,000
10,800,000
$58,300,000

Contract
Spot
Total

Year 2
$47,500,000
16,200,000
$63,700,000

Year 3
$47,500,000
20,700,000
$68,200,000

Year 4
$47,500,000
8,100,000
$55,600,000

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
Land
NWC
Total

–$85,000,000
–7,000,000
–2,915,000
–$94,915,000

Now we can calculate the OCF each year. The OCF is:

Sales
VC
FC
Dep.
EBT
Tax
NI
+ Dep.
OCF

Year 1
$58,300,000
19,220,000
4,300,000
12,155,000
$22,625,000
8,597,500
$14,027,500
12,155,000
$26,182,500

Year 2
$63,700,000
21,080,000
4,300,000
20,825,000
$17,495,000
6,648,100
$10,846,900
20,825,000
$31,671,900

Year 3
$68,200,000
22,630,000
4,300,000
14,875,000
$26,395,000
10,030,100
$16,364,900
14,875,000
$31,239,900

18

Year 4
$55,600,000
18,290,000
4,300,000
10,625,000
$22,385,000
8,506,300
$13,878,700
10,625,000
$24,503,700

Year 5

$2,800,000

Year 6

$7,500,000

–$2,800,000 –$7,500,000
1,064,000
2,850,000
–$1,736,000 –$4,650,000
0
0
–$1,736,000 –$4,650,000

Years 5 and 6 are of particular interest. Year 5 has an expense of $2.8 million to reclaim the land, and it is the only expense for the...