Mini Case Study-Bethesda Mining Essay examples

1341 WordsJul 8, 20116 Pages
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…show more content…
After Tax Flow After tax Cash flow at termination Tax rate= 38% Year 4 Cost of reclamation= $2,800,000 Tax credit= $1,064,000 =38.% x $2,800,000 After tax cost (outflow) $1,736,000 Year 6 Charitable expense deduction= $7,500,000 Tax credit (inflow)= $2,850,000 =38.% x $7,500,000 The payback period is 3.08 years. This calculation was achieved by determining the number of years in which the initial investment is recouped. Payback = year before full recovery + (unrecovered cost at start of year/cash flow during year). Table 8. Payback Period Year Cash flow Cumulative cash flow 0 ($94,915,000) ($94,915,000) 1 $25,909,270 ($69,005,730) 2 $31,443,670 ($37,562,060) 3 $31,866,670 ($5,695,390) 4 $67,254,990 $61,559,600 5 $0 $61,559,600 6 $2,850,000 $64,409,600 $64,409,600 Payback period 3.08 years 5,695,390/67,254,990 = .08 In order to determine the profitability index, the net present value must be determined. Table 9. NPV Net Present Value To calculate the NPV ( Net Present Value) we discount the cash flow at the given discount rates discount rate= 12% Year Cash flow PV factor @12.% Discounted cash flow= 0 ($94,915,000) 1 ($94,915,000) =-94915000*1 1 $25,909,270 0.89285714 $23,133,277 =25909270*0.892857 2 $31,443,670 0.79719388
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