Bethesda Mining Company
Mini-Case Study: Bethesda Mining Company
You have to provide details in all the response and remember that you have to produce graduate written. I have provided the case study in a separate attachment.
In this case study, found on page 206 of your course text, you are asked to analyze the benefits and costs of a proposed project. After reading the case study:
� Calculate the financial figures requested.
� Write up a brief recommendation as to the feasibility of the project (3 paragraphs).
� Justify your recommendation using your calculations.
Write up a 1.5-page summary of your findings, and also including any calculations you might have made and relate how you reached your conclusion.
Introduction
Bethesda mining Company is a firm whose main financial activity is coal mining. The new development in environmental conservation has complicated their operations and now they have to allocate some costs at the end of the final year of operations to reclaim the mine fields.
The following are the details of the company’s financial forecasts.
| Bethesda mining Company | ||||
| Years | 1 | 2 | 3 | 4 |
| Production (Tons) | 620,000 | 680,000 | 730,000 | 590,000 |
| Contract Sales ($82 per ton) | 500,000 | 500,000 | 500,000 | 500,000 |
| Spot market sales ($76 per ton) | 120,000 | 180,000 | 230,000 | 90,000 |
| Contract Sales ($82 per ton * row 2) | 41,000,000 | 41,000,000 | 41,000,000 | 41,000,000 |
| Spot market sales ($76 per * row 3) | 9,120,000 | 13,680,000 | 17,480,000 | 6,840,000 |
| Total sales | 50,120,000 | 54,680,000 | 58,480,000 | 47,840,000 |
| Less variable costs ($31 per ton) | 19,220,000 | 21,080,000 | 22,630,000 | 18,290,000 |
| Contribution margin | 30,900,000 | 33,600,000 | 35,850,000 | 29,550,000 |
| Less Fixed costs | 4,100,000 | 4,100,000 | 4,100,000 | 4,100,000 |
| Net working capital investments 5% of sales | 2,506,000 | 2,734,000 | 2,924,000 | 2,392,000 |
| Depreciation of equipment | 12,146,500 | 20,816,500 | 14,866,500 | 10,616,500 |
| Earnings Before taxes | 12,147,500 | 5,949,500 | 13,959,500 | 12,441,500 |
| Taxes 38% | 4,616,050 | 2,260,810 | 5,304,610 | 4,727,770 |
| Net earnings | 7,531,450 | 3,688,690 | 8,654,890 | 7,713,730 |
| Percentage earnings in % (Av NP = 13.17 %) | 15.03 | 6.75 | 14.80 | 16.12 |
My recommendations to the management of Bethesda Mining company is that the project has an overall profitable financial future but the standards it does not meet the threshold set by the company besides its NPV is negative and the profitability index is below the standard set for the company’s returns of 12%. The repayment period as calculated by the payback period approach is very long and it’s uneconomical.
Bethesda Mining Company
| Total expenses | 42,588,550 | 50,991,310 | 49,825,110 | 40,126,270 | |
| Assumption | |||||
| Land reclamation will be done on year 5 and the tax expense credits will also be claimed for that period. | |||||
| Payback period (13 yrs) | 90,000,000 / 27,588,760 | 3.26219808 | 13.04879233 | ||
| Present value of Net income | 8,435,224 | 4,627,093 | 12,159,497 | 12,137,703 | 37,359,518 |
| Total investment | 90,000,000 | ||||
| 3. NPV | (52,640,482) | ||||
| 2. Profitability Index | 0.09 | 0.05 | 0.14 | 0.13 | 0.1 |
| 4. Internal Rate of Return (34.4%) | 0.344 | 34.40% |
Based on the facts above and the evidence below, I would recommend to the management of Bethesda Mining Company that the project should not be undertaken and it should be rejected.
The calculations below reveal that the company has a negative NPV of 52,640,482 which is unacceptable. Profits that have negative NPV should be rejected.
The Payback period for the project is 13 years. A company has paid for four years mining rights will find unprofitable if the project takes too long to recoup its initial capital outlay.
The profitability index is 10% and the company’s minimum rate of return is 12%. The profitability index has been calculated using the formula Present value of net income/ the initial investment amount. i.e. for PI for year 1 is equal to $8,435,224 / $90,000,000. Bethesda Mining Company falls short of its target by 2% however the average Net profit margin for the project is 13.2%. (Hayes, Pisano, Upton and Wheelwright, 2005)
To conclude, the Bethesda Mining Company is appealing because of its high returns but which after deducting all the expenses and taxation, the balance is not sustainable. Its NPV is negative and the profitability index is below the standard set for the company’s returns of 12%. The repayment period as calculated by the payback period approach is also very long and it’s not profitable in the long-run.
Reference
Hayes, Pisano, Upton and Wheelwright (2005) Pursuing the competitive Edge, Wiley & Sons, NY, pg 264.
