Mini Case Study-Bethesda Mining

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Mini Case Study-Bethesda Mining

Mini-Case Study: Bethesda Mining Company
Week 4 Application 2 Jo-Ann Savoie
Walden University
Finance: Fiscal Leadership in a Global Environment
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
(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
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
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