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

...CHAPTER 6, Case #1
BETHESDAMINING
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...

...BethesdaMining Company
To be able to analyze the project, we need to calculate the project’s NPV, IRR, MIRR, Payback Period, and Profitability Index.
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 | 2 | 3 | 4 |
Contract | $ 20,000,000 | $ 20,000,000 | $ 20,000,000 | $ 20,000,000 |
Spot | $ 19,720,000 | $ 22,620,000 | $ 25,520,000 | $ 18,560,000 |
Total sales | $ 39,720,000 | $ 42,620,000 | $ 45,520,000 | $ 38,560,000 |
Ton | 740,000 | 790,000 | 840,000 | 720,000 |
The current after-tax 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($39,720,000) = $198000
So, the cash flow today is:
Equipment –$34,000,000
Land –6,200,000
NWC –1,980,000
Total –$40,2000,000
Now we can calculate the OCF each year. The OCF is:
| Year | |
| 1 | 2...

...BethesdaMining Company
02/24/2011
Introduction
BethesdaMining is a midsized coal mining company with 20 mines located in Ohio, Pennsylvania, West Virginia, and Kentucky. Recently the coal mining industry has been impacted by environmental regulations that have presented challenges for the industry. However, a combination of increased demand for coal and new pollution reduction technologies has led to an improved market demand for high-sulfur coal. Bethesda is considering operating a new strip mine in Ohio on 5,000 acres of land it purchased 10 years ago for $5,300,000. Bethesda is currently operating at full capacity and if this project is undertaken will need to purchase additional equipment that will cost $34,000,000. The project will provide a four-year contract that calls for the delivery of 400,000 tons of coal per year at a price of $50 per ton. At the end of the mining at the site, Bethesda will be responsible for reclaiming the land. After the land is reclaimed, the company plans to donate the land to the state for use as a public park and recreation area and receive a charitable expense deduction of $6,000,000.
The purpose of this paper is to analyze the project through calculating the payback period, profitability index, average accounting return, net present value, internal rate of return, and modified internal...

...NOVA School of Business and Economics
Corporate Finance, 2nd Semester 2012/2013
CaseStudy
TOSCO is a company listed in the Portuguese Stock Exchange operating a supermarket
chain established in Portugal for many years. The market for traditional food retailers is saturated,
and there is no room for growth under the same business model. TOSCO’s shareholders have been
pressuring the management to pursue new opportunities in order to increase the value of their
shares.
The management of TOSCO has hired Nova Investment Bank (NIB) to study the possibility
of expanding their activities to Spain. For this they will pay NIB a fixed fee of €100,000. You are an
analyst at NIB and your job is to perform a financial analysis of this opportunity. Bellow you can
find the number of stores they plan to have fully operational in the beginning of each year for the
next 3 years (some will be rented, others will be bought).
# New Stores
Y0
0
Y1
10
Rent
Y2
20
Buy
Y3
10
Buy
Also, you know that today the average monthly rent per square meter in Spain is €30 and
the market value per square meter sold is €6,000. Additionally, TOSCO will need to invest
€13,000,000 in the acquisition of a distribution center one year before the first stores open. Own
stores will be fully depreciated in 20 years.
In Spain, each store will employ 50 employees, and the distribution center will employ 75....

...BethesdaMining
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...

... CHAPTER 7, Case #1 BETHESDAMINING
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...

...ASSIGNMENT 1: Strategic Corporate Finance
Type of Assessment: CaseStudy: 2500 words (equivalent)
Submission deadline: Upload to Moodle before 14:00 noon Friday 22nd March 2013.
Weighting: 50% of module mark
Uploading to Moodle
* Attach the feedback sheet and marking grid to the front of your assignment
* Upload your spreadhseet
Learning outcomes
1. Analyse different capital budgeting techniques
2. Evaluate the information derived from different capital budgeting techniques
Introduction
You work at the headquarters of the Yorkshire Wind Farm Company and are responsible for the evaluation of capital projects. The business is currently trying to decide between 2 proposed wind farms. One is onshore, located in the Yorkshire dales and the other is offshore, a few miles from Scarborough.
Each project has a capacity of 10MW and a life of 20 years. In general, offshore wind farms costs more to build but there is more wind they will generate more electricity.
Revenue and costs
Revenue will come from selling the electricity to distributors. A tariff of £70/MWh is what is the government is currently guaranteeing.
The amount of electricity generated depends on the strength of the wind and the number of hours of generating that is expected. The wind farms are expected to generate the following amounts of electricity:
| Onshore | Offshore |
Annual output (MWh) | 31,000 | 50,000 |
It is expected that a full...

...MiniCase Report – The Dilemma at Day-Pro
1) PayBack Period for Synthetic Resin and Epoxy Resin:
Synthetic Resin PBP = 2 + 250/200 = 2.5 years
Epoxy Resin PBP = 1 + 200/400 = 1.5 years
To show that using the Payback Period to evaluate the projects is flawed, Tim can argue that the PayBack Period ignores the time value of money, requires an arbitrary cutoff point, ignores cash flows beyond the cutoff date, and is biased against long-term projects, such as research and development, and new projects (Corporate Finance page 238).
2) Discounted payback Period (DPP) using 10% discount rate:
Synthetic Resin DPP:
{1,000,000 – [(350,000)/(1 + 0.1)^1 + (400,000)/(1+0.1)^2]} x 100 = 35,124,100/375,657 = 93.5% of year 3
1 + 1 +0.935 =2.935
Epoxy Resin DPP:
{800,000 – [(600,000)/(1 + 0.1)^1]} x 100 = (800,000 – 545,454.5) x 100 = 25,454,550/330,578.5 = 77% of year 2.
1 +0.77= 1.77
Tim should not ask the Board to use DPP as the deciding factor because DPP does not provide a concrete decision criterion that can indicate whether the investment will increase the firm's value, it requires an estimate of the cost of capital in order to calculate the payback, and it ignores cash flows beyond the discounted payback period.
4) Synthetic Resin IRR = 37%
Epoxy Resin IRR = 43%
IRR calculated using Excel
Tim can convince the board that IRR measure can be misleading by explaining that it may result in multiple answers with...