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.
Bethesda Mining Company 2
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
- NPV
(52,640,482)
- Profitability Index
0.09
0.05
0.14
0.13 0.1
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
Reference
Hayes, Pisano, Upton and Wheelwright (2005) Pursuing the competitive Edge, Wiley & Sons,
NY, pg 264.
