Mini Case Study-Bethesda Mining

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Mini-Case Study: Bethesda Mining Company
Week 4 Application 2 Jo-Ann Savoie
Walden University
Finance: Fiscal Leadership in a Global Environment
DDBA-8140-2
Dr. Guerman Kornilov
March 24, 2011

The following Mini-Case on Bethesda Mining Company was taken from the text corporate finance (2010, P. 203-204). In order to determine if Bethesda Mine should open, a thorough analysis of the payback period, profitability index, average accounting return, net present value, internal rate of return, and the modified internal rate of return have been conducted. Table 1. Cash flow on Investment

Tax rate=38%

Year 0 Cash flow (outflow) on investment

Opportunity cost of using land=$7,000,000
Cost of equipment=$85,000,000
Total$92,000,000

Table 2. MACRS 7-Year Schedule
MACRS 7 years schedule
YearDepreciation
114.29%
224.49%
317.49%
412.49%
58.93%
68.92%
78.93%
84.46%
100.00%
(Table retrieved from Small Business Taxes & ManagementTM Copyright 2011, A/N Group, Inc.) Table 3. Cost of Equipment Valued at a Four -Year Depreciation Rate Cost of equipment=$85,000,000

YearDepreciation %Depreciation
114.29%$12,146,500=14.29% x $85,000,000
224.49%$20,816,500=24.49% x $85,000,000
317.49%$14,866,500=17.49% x $85,000,000
412.49%$10,616,500=12.49% x $85,000,000
68.76%$58,446,000
The book value after the four-year period is valued at $26,554,000. This figure was achieved by taking the initial value of $85,000,000 minus the four- year depreciation value of $58,446,000. The market value of the equipment at the end of the four- year at 60% of purchase is $51,000,000 (60% x 85,000,000). Table 4. After Tax Cash Inflow on Sale of the Equipment

Sale Price=$51,000,000
Book value=$26,554,000
Profit=$24,446,000
Tax @38%=$9,289,480=38% x $24,446,000

After tax cash inflow on sale of equipment=$41,710,520=$51,000,000 - $9,289,480

Table 5. Calculation of Operating Cash Flow (after tax)
Sales@@
YearProduction $95.00Surplus Production over 500,000$90.00Total 1620,000500,000$47,500,000120,000$10,800,000$58,300,000 2680,000500,000$47,500,000180,000$16,200,000$63,700,000 3730,000500,000$47,500,000230,000$20,700,000$68,200,000 4590,000500,000$47,500,00090,000$8,100,000$55,600,000

Costs
Variable cost @Fixed CostDepreciation expenseTotal expense YearProduction$31.00
1620,000$19,220,000$4,300,000$12,146,500$35,666,500
2680,000$21,080,000$4,300,000$20,816,500$46,196,500
3730,000$22,630,000$4,300,000$14,866,500$41,796,500
4590,000$18,290,000$4,300,000$10,616,500$33,206,500

Operating cash flow (after tax)
Tax @
YearRevenueTotal expenseProfit before tax38%Profit after taxAfter tax cash flow (add back depreciation 1$58,300,000$35,666,500$22,633,500$8,600,730$14,032,770$26,179,270 2$63,700,000$46,196,500$17,503,500$6,651,330$10,852,170$31,668,670 3$68,200,000$41,796,500$26,403,500$10,033,330$16,370,170$31,236,670 4$55,600,000$33,206,500$22,393,500$8,509,530$13,883,970$24,500,470

After tax cash flow was determined by taking the profit after tax and adding the depreciation expense. ($26,179,270= $14,032,770+$12,146,500; $31,668,670 =$10,852,170+20,816,500; $31,236,670= $16,370,170+$14,866,500; and $24,500,470= 413,883,970+$10,616,500). Table 6. Working Capital Requirements

Working capital requirements
5%of sales next year

YearNext year salesWorking capital required Additional working capital (outflow) 0$58,300,000$2,915,000=5.% x $58,300,000$2,915,000
1$63,700,000$3,185,000=5.% x $63,700,000$270,000
2$68,200,000$3,410,000=5.% x $68,200,000$225,000
3$55,600,000$2,780,000=5.% x $55,600,000-$630,000

The additional working cash flow is determined by minus the working capital from the...
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