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Ch8 Bethesda Mining Comapny

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Bethesda Mining 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 | …show more content…

us the accumulated depreciation, or:
Book value of equipment = $34,000,000 – 4,858,600 – 7,646,600– 5,946,600 – 4,399,600
Book value of equipment = $ 11,148,600
Since the market value of the equipment is $20.4 million, the equipment is sold at a gain to book value, so the sale will incur the taxes of:
Taxes on sale of equipment = ($20,400,000 – 11,148,600 )(.38) = $3,515,532
And the after-tax salvage value of the equipment is:
After-tax salvage value = $20,400,000 – 3,515,532
After-tax salvage value = $16,884,468
So, the net cash flows each year, including the operating cash flow, net working capital, and after-tax salvage value, are: | Year | | 0 | 1 | 2 | 3 | 4 | 5 | 6 | Capital Spending | -34000000 | $0 | $0 | $0 | $15,062,400 | $0 | $0 | Opportunity Cost | -6200000 | | | | | | | NWC | (1,986,000 ) | -$145,000.00 | -$145,000.00 | $348,000.00 | $1,928,000.00 | | | OCF | | 12187868 | 14,239,308 | 14585308 | $11,616,648 | -3100000 | -3720000 | Total Project Cash Flow | 421860000 | 12042868 | $14,094,308.00 | $14,933,308.00 | $28,607,048.00 | -3100000 | -3720000 |

So, the capital budgeting analysis for the project is:
Payback period = 3 + $1115502/$28607048
Payback period = 3.04 years
Profitability index =

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