Chapter 6

Bethesda Mining
Input area:
Equipment
Land cost
Aftertax land value
Equipment Salvage
Contract sales/tons
Year 1 production
Year 2 production
Year 3 production
Year 4 production
Contract $/ton
Spot market $/ton
Variable cost/ton
Year 1 depreciation
Year 2 depreciation
Year 3 depreciation
Year 4 depreciation
Fixed costs
Reclamation costs
Charitable expense
NWC percent
Tax rate
Required return

$
$
$

85,000,000
5,000,000
5,500,000
60%
500,000
620,000
680,000
730,000
590,000
$82
$76
$31
14.29%
24.49%
17.49%
12.49%
$4,100,000
$2,700,000
$6,000,000
5%
38%
12%

Output area:

Table 1: Summary of Project Cash Flows

1 Equipment
2 Land
3 NWC
4 Total

$
$

Sales
5 Contract
6 Spot
7 Total

Year 1

(228,000)
($228,000)

$
$

Sales
8 VC
9 FC
10 Dep
11 EBT
12 Tax
13 NI
14 + Dep
15 OCF
16 TOTAL CF

Year 0
(85,000,000)
(5,500,000)
(2,506,000)
($93,006,000)

50,120,000
19,220,000
4,100,000
12,146,500
14,653,500
5,568,330
9,085,170
12,146,500
21,231,670

(93,006,000) $

21,003,670

$
$

Year 1
41,000,000
9,120,000
50,120,000

NOTES:
1 Cost of Equipment per case in year 0. In year 4, after-tax cash flow (see Table 3).
2 Year 0: Market Value of Land per case, opportunity cost.
Year 6: $2.28 million is the tax credit associated with the land donation ($6m x .38). The land donation is required to purs
3 Net Working Capital, See Table 2: Net Working Capital
4 Investment Cash Flows = Equipment Cost (1) + Land Opportunity Cost (2) + Net Working Capital (3)
5 Contract Sales, See Table 2
6 Spot Sales, See Table 2
7 Total Sales = Contract Sales (5) + Spot Sales (6)
8 Production in each year (see Table 2) x $31/ton variable cost
9 Fixed Costs per case. In year 5, fixed costs represent reclamation costs of $2.8 million
10 Depreciation, See Table 3
11 Earnings Before Tax = Sales (7) - Variable Costs (8) - Fixed Costs (9) - Depreciation (10)
12 Tax Rate (38%) x EBT
13 Net Income = EBT (11) - Tax (12)
14 Depreciation add-back, non-cash expense

15 Operating Cash Flow (OCF) = Net Income (13) + Depreciation (14)

Table 2: Calculation of Sales and Working Capital Requirements:

Production
Contract Sales (tons)
Contract Price $
Contract Sales $

620,000
500,000
$82
41,000,000

Spot Sales
Spot Price $
Contract Sales $

120,000
$76
9,120,000

Total Sales $

50,120,000

- $
2,506,000 $
(2,506,000) $

2,506,000
2,734,000
(228,000)

Beg WC (5% Sales)

Ending WC
Change in WC

$
$
$

Production per case

Contract Sales of 500,000/year @ $95/ton, per case
Spot Sales @ $90/ton, per case
Working Capital @ 5% of Sales, per case
Working Capital requirements taken in year PRIOR to sales, per case

Table 3: Calculation of Equipment Book Value and Salvage Value

Book value
$
MACRS Rate
Depreciation (BV * MACRS)
Accumulated Depreciation
Salvage (Year 4)

85,000,000 $
$
$

MV
BV
Taxes

Salvage CF

72,853,500
14.29%
12,146,500
12,146,500

51,000,000
26,554,000
(9,289,480)
41,710,520

$
$
$
$
$

Cash flow
(93,006,000)
21,003,670
26,010,270
25,866,270
63,915,790

Table 4: Project Evaluation

From Table 1:

Time
0
1
2
3
4

5
6
Profitability index
IRR
IRR
NPV

$
$

(1,674,000)
2,280,000
1.0615
14.39%
14.39%
$5,718,491.29

Year 2

Year 3
$

(190,000)
($190,000)

532,000
$532,000
Year 3
41,000,000 $
17,480,000
58,480,000 $

54,680,000
21,080,000
4,100,000
20,816,500
8,683,500
3,299,730
5,383,770
20,816,500
26,200,270

58,480,000
22,630,000
4,100,000
14,866,500
16,883,500
6,415,730
10,467,770
14,866,500
25,334,270

26,010,270 $

$
$

$
$

$
$
$

$
$
$

25,866,270 $

$0

Year 4
41,000,000
6,840,000
47,840,000
47,840,000
18,290,000
4,100,000
10,616,500
14,833,500
5,636,730
9,196,770
10,616,500
19,813,270

Year 5

2,700,000

(2,700,000)
(1,026,000)
(1,674,000)
(1,674,000)

63,915,790 $

(1,674,000)

8). The land donation is required to pursue the project so there is no direct salvage for the land.

Working Capital (3)

Year 5

2,392,000
$44,102,520

Year 2
41,000,000 $
13,680,000
54,680,000 $

Year 4
41,710,520

uirements:

680,000
500,000
$82
41,000,000 $

730,000
500,000
$82
41,000,000 $

590,000
500,000
$82
41,000,000

180,000
$76
13,680,000 $

230,000
$76
17,480,000 $

90,000
$76
6,840,000

54,680,000 $

58,480,000 $

47,840,000

$
$
$

2,734,000 $
2,924,000 $
(190,000) $

2,924,000 $
2,392,000 $
532,000 $

2,392,000
2,392,000

52,037,000 $
24.49%
20,816,500 $
32,963,000 $

37,170,500 $
17.49%
14,866,500 $
47,829,500 $

26,554,000
12.49%
10,616,500
58,446,000

vage Value
$
$
$

60% of Purchase Price per case

see Book Value above
38%, per case
Market Value (MV) - Tax Liability

Year 6
$

2,280,000
$2,280,000
Year 6

2,280,000