Bethesda Mining zirconium
Bethesda Mining
In order to decide whether our company should undertake the project, we should refer to the project’s NPV and IRR. NPV indicates the possible profit (net cash flow) which the project will yield in future, a positive NPV suggests that company can earn profit from the investment and vice versa. IRR is the discounted rate which makes the NPV of all cash flows equal to zero, the greater the amount it exceeds the cost of capital (required rate of return), the higher the net cash flow to the investor, our company should go ahead with the project if its’ IRR is higher than the required rate of return. To obtain those numbers, we need to calculate the net cash flows (i.e. the incremental cash flows) generated by the project in each year of the project’s life.
The net cash flows each year equal to the sum of the capital expenditure (capital spending), the opportunity cost, the operating cash flow (OCF) and the net working capital cash flow (or the additions to NWC). In the case of our project, since the fact that the equipment is kept to be used in another strip mine of our company is nothing different from selling out the equipment and use the money to invest in the new project, in other words, its provide our company more capital (positive capital expenditure), the after- tax salvage value should be taken into account and included in the net cash flow formula which is employed to calculate the incremental cash flow in year 4.
Following the above logical thought, we first calculate the operating cash flow. To be able to do so, we initially calculate the sales in each year as they take part in determining the operating cash flows. In each year, our company has to sell 600,000 tons of coal at £34 per ton, and the excess coal at the spot price. Hence, the sale per year is the contract price per ton times 600,000 tons plus spot market price times excess coal. The sale revenue per year is:
Year 1
Year 2
Year 3
Year 4
Contract sale (£)
20,400,000
In order to decide whether our company should undertake the project, we should refer to the project’s NPV and IRR. NPV indicates the possible profit (net cash flow) which the project will yield in future, a positive NPV suggests that company can earn profit from the investment and vice versa. IRR is the discounted rate which makes the NPV of all cash flows equal to zero, the greater the amount it exceeds the cost of capital (required rate of return), the higher the net cash flow to the investor, our company should go ahead with the project if its’ IRR is higher than the required rate of return. To obtain those numbers, we need to calculate the net cash flows (i.e. the incremental cash flows) generated by the project in each year of the project’s life.
The net cash flows each year equal to the sum of the capital expenditure (capital spending), the opportunity cost, the operating cash flow (OCF) and the net working capital cash flow (or the additions to NWC). In the case of our project, since the fact that the equipment is kept to be used in another strip mine of our company is nothing different from selling out the equipment and use the money to invest in the new project, in other words, its provide our company more capital (positive capital expenditure), the after- tax salvage value should be taken into account and included in the net cash flow formula which is employed to calculate the incremental cash flow in year 4.
Following the above logical thought, we first calculate the operating cash flow. To be able to do so, we initially calculate the sales in each year as they take part in determining the operating cash flows. In each year, our company has to sell 600,000 tons of coal at £34 per ton, and the excess coal at the spot price. Hence, the sale per year is the contract price per ton times 600,000 tons plus spot market price times excess coal. The sale revenue per year is:
Year 1
Year 2
Year 3
Year 4
Contract sale (£)
20,400,000