PROBLEM:
BETHESDA MINING COMPANY
Considering the price per ton is $86, the total value to be sold under the contract is 500,000 tons multiplied by
SPOT Value:
The projected coal for the next 4 years is as follows:
Year
Production
1st year
620,000 tons
2nd year
680,000 tons
3rd year
730,000 tons
4th year
590,000 tons
Contract call for delivery of 500,000 tons of coal per year. The excess production will be sold in the spot market
Year
1st year
2nd year
3rd year
4th year
Production
620,000 tons
680,000 tons
730,000 tons
590,000 tons
Total sales for the next four years: is addition of contract value and spot production value calculation.
Year
Contract
1st year
$43.000.000,00
2nd year
$43.000.000,00
3rd year
$43.000.000,00
4th year
$43.000.000,00
Solution:
Cash Flow:
The initial NWC is required to calculate the total cash flow.
Formula for NWC = Sales tax X Total sales
Sales tax is 5% i.e. 0.05
Total sales
Sales tax
$52.240.000
0,05
$56.860.000
0,05
$60.710.000
0,05
$49.930.000
0,05
To find the current cash flow today, add the provided equipment cost of $ 95 million, the land cost of
$6.5 million and NWC which totals to (-$ 104,112,000)
Net working capital cash flow:
The net working capital cash flow (NWC CF) is determined by the value of 5% of next year’s sales.
Using the formula, the yearly NEWC CF is:
Year
1st year
Starting
$2.612.000,00
Ending
NWC Cash flow
$2.843.000,00
($231.000,00)
Book Value:
Book value is the total equipment value minus the depreciation value. MACRS 7-year depreciation rate is as foll
Year
1
2
3
4
7-year depreciation rate
14,29%
24,49%
17,49%
12,49%
Based on the MACRS schedule and a contract and salvage rate of 4 years,
the depreciation value are shown in the table:
Year
1st year
Sales
$52.240.000,00
Variable
$19.220.000,00
Fixed
$4.100.000,00
Depreciation
$13.575.500,00
Variable cost is the total projected coal production times $31 per ton. The fixed cost is $41000000.
And the depreciation cost is calculated $95 million times the MACRS value per year respectively.
Considering the original equipment cost is $95 million, the formula used to find the book value is:
Book value= $95000000- $13575500-$23265500-$16615500-$11865500
= 29678000,00
Net cash Flow:
NWC= OCF+NWC CF+ Salvage Value
We need to determine the EBT to calculate the OCF.
Year
1st year
Sales
$52.240.000
Variable
$19.220.000
Fixed
$4.100.000
Depreciation
$13.575.500
EBT
$15.344.500
OCF can be calculated as follows:
OCF=EBT-Tax+Depreciation
Year
EBT
Tax
Net Income
Depreciation
OCF
Salvage Value
1st year
$15.344.500
$5.830.910
$9.513.590
$13.575.500
$23.089.090
Salvage value is the equipment value minus the equipment sales tax value.
The sales tax value is the book value minus the equipment value total, minus the tax value.
The calculation is as follows:
Equipment value= 95million times 60%= 57000000
Equipment sales taxes= ($ 29,678,000.00- $ 57000, 000.00) X .38
= $ (- 10,382,360.00)
Salvage value= ($ 57000000-10,382,360.00) = $ 46,617,640.00
Net Cash Flow
Years
Capital Spending
Opportunity Cost
NWC
OCF
Total Project Cash Flow
0
($95.000.000)
($6.500.000)
($2.612.000)
($104.112.000)
So, the capital budgeting analysis for the project is:
Payback period = 3 + ($104112000-$ (22,858,090+$28289990+$27920490)) /$70697830
=3+0.71= 3.71 years
Profitability Index= $104,930,077.79 / $104,112,000= 1.0079
IRR = -$104,112,000/ (1+IRR)^0 + $ 22,858,090/(1+IRR)^1 + $28,289,990/(1+IRR)^2 +
$27,920,490/ (1+IRR)^3 + $70,697,830/(1+IRR)^4 + -$1,674,000/(1+IRR)^5 + -$3,720,000/(1+IRR)^6
12%
NPV
Year
0
OCF
($104.112.000)
PV Factor (@12%)
1
PV
-104112000
NPV
$818.664,74
Based on the results and as the NPV is positive, it is advisable that the company should accept
the project
l value to be sold under the contract is 500,000 tons multiplied by $86 i.e. $43000000.
coal per year. The excess production will be sold in the spot market at an average of $77 per ton
Spot production Value Calculation
(620000-500000) X 77
(680000-500000) X 77
(730000-500000) X 77
(590000-500000) X 77
Spot production Value
$9.240.000,00
$13.860.000,00
$17.710.000,00
$6.930.000,00
n of contract value and spot production value calculation.
Spot production Value Calculation
Total Sales
$9.240.000,00
$52.240.000,00
$13.860.000,00
$56.860.000,00
$17.710.000,00
$60.710.000,00
$6.930.000,00
$49.930.000,00
otal cash flow.
NWC
$2.612.000,00
$2.843.000,00
$3.035.500,00
$2.496.500,00
provided equipment cost of $ 95 million, the land cost of
s determined by the value of 5% of next year’s sales.
2nd year
$2.843.000,00
3rd year
$3.035.500,00
4th year
$2.496.500,00
$3.035.500,00
($192.500,00)
$2.496.500,00
$539.000,00
0
$2.496.500,00
us the depreciation value. MACRS 7-year depreciation rate is as follows:
t and salvage rate of 4 years,
2nd year
$56.860.000,00
$21.080.000,00
$4.100.000,00
$23.265.500,00
3rd year
$60.710.000,00
$22.630.000,00
$4.100.000,00
$16.615.500,00
4th year
$49.930.000,00
$18.290.000,00
$4.100.000,00
$11.865.500,00
2nd year
$56.860.000
$21.080.000
$4.100.000
$23.265.500
$8.414.500
3rd year
$60.710.000
$22.630.000
$4.100.000
$16.615.500
$17.364.500
4th year
$49.930.000
$18.290.000
$4.100.000
$11.865.500
$15.674.500
2nd year
$8.414.500
$3.197.510
$5.216.990
$23.265.500
$28.482.490
3rd year
$17.364.500
$6.598.510
$10.765.990
$16.615.500
$27.381.490
4th year
$15.674.500
$5.956.310
$9.718.190
$11.865.500
$21.583.690
uction times $31 per ton. The fixed cost is $41000000.
million times the MACRS value per year respectively.
95 million, the formula used to find the book value is:
500-$16615500-$11865500
5th year
$2.700.000
($2.700.000)
5th year
($2.700.000)
($1.026.000)
($1.674.000)
($1.674.000)
the equipment sales tax value.
he equipment value total, minus the tax value.
57000, 000.00) X .38
= $ 46,617,640.00
1st year
$0
2nd year
$0
3rd year
$0
4th year
$46.617.640
($231.000)
$23.089.090
$22.858.090
($192.500)
$28.482.490
$28.289.990
$539.000
$27.381.490
$27.920.490
$2.496.500
$21.583.690
$70.697.830
2nd year
$28.289.990
0,8
$22.631.992,00
3rd year
$27.920.490
0,71
$19.823.547,90
4th year
$70.697.830
0,64
$45.246.611,20
8,090+$28289990+$27920490)) /$70697830
112,000= 1.0079
90/(1+IRR)^1 + $28,289,990/(1+IRR)^2 +
R)^4 + -$1,674,000/(1+IRR)^5 + -$3,720,000/(1+IRR)^6
1st year
$22.858.090
0,89
$20.343.700,10
ive, it is advisable that the company should accept
6th year
$6.000.000
($6.000.000)
6th year
($6.000.000)
($2.280.000)
($3.720.000)
($3.720.000)
5th year
$0
6th year
$0
($1.674.000)
($1.674.000)
($3.720.000)
($3.720.000)
5th year
($1.674.000)
0,57
-954180
6th year
($3.720.000)
0,51
($1.897.200,00)