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.
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.
Bethesda Mining Company 2
The following are the details of the company’s financial forecasts.
Bethesda mining Company
Years 1 2 3 4
Contract Sales ($82 per ton)
Spot market sales ($76 per ton)
Contract Sales ($82 per ton * row 2)
Spot market sales ($76 per * row 3)
Less variable costs ($31 per ton)
Less Fixed costs
Net working capital investments 5% of sales
Depreciation of equipment
Earnings Before taxes
Percentage earnings in % (Av NP = 13.17 %)
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
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
Total investment 90,000,000
- Profitability Index
Bethesda Mining Company 3
- 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.
Bethesda Mining Company 4
Hayes, Pisano, Upton and Wheelwright (2005) Pursuing the competitive Edge, Wiley & Sons,
NY, pg 264.