BRYNN CURRY – PORTFOLIO PROJECT COVER SHEET
Bethesda and Goodweek Financial Management Cases
The Bethesda and Goodweek cases both involved calculating whether or not a project should be undertaken
by a company. The cases involved 4-year plans and provided the projected inputs and outputs over the project
lifetime.
I have provided a summary of the 2 problems as well as the resulting recommendations based on the analysis
as the last page.
Competencies Developed
o Advanced MS Excel and financial calculations
o Big picture scope of an entire lifecycle of a large project
o Importance of tax shields and how to take advantage of them
Microsoft Excel Work
** Microsoft PowerPoint Presentations, original data, and/or original Microsoft Excel works available upon request, if applicable to project.
Financial Management Mini-Case Problems – Summary
Class: B512 Financial Management
Bethesda Mining Company – Proposed Strip Mining Contract
Should Bethesda complete the project based on the following inputs and outputs of the project and its
required rate of return? “Calculate the payback period, profitability index, net present value, and internal rate
of return for the new strip mine.” (Ross, Westerfield, & Jaffe, 2013)
Numbers given:
PROPOSED
CONTRACT:
4 years
500,000 tons of coal per year at $82 per ton
PRODUCTION: Coal production would produce the following for 4 years, in order
620,000 tons 680,000 tons 730,000 tons 590,000 tons
Variable cost: $31 per ton
Fixed cost: $4.1 million per year
Net working capital investment of 5% of sales to be built up in the year prior to sales
Excess production can be sold on spot market for $76 per ton
LAND:
Purchased for $5 million (10 years ago)
Could sell for after-tax profit of $5.5 million
If mined, land legally must be reclaimed: cost $2.7 million (this would be done year 5)
If mined, land will be donated as Public Park with deduction of $6 million (year 6)
EQUIPMENT: cost $85 million
Use 7-year MACRS depreciation schedule
Equipment can be sold for 60% of its purchase price (after the 4-year contract is complete)
However, Bethesda will use equipment in its next project
TAX RATE:
38% (assume that a loss in any year will result in a tax credit)
REQUIRED RETURN: 12%
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Goodweek Tires – Proposed New Product Launch
Should Goodweek begin sales of the newly developed product (SuperTread tire)? “What are the NPV, payback
period, discounted payback period, IRR, and PI on this project?” (Ross, Westerfield, & Jaffe, 2013)
PROPOSED
CONTRACT:
4 years
Variable cost of each tire $29
Fixed cost $43 million per year
Variable cost and fixed cost increases 1% above inflation each year
WORKING
Initial working capital of $9 million
CAPTIAL
Thereafter, 15% of sales
REQUIREMENT:
PRICE:
OEM market at $41 per tire
Replacement market at $62 per tire
Price increases 1% above inflation each year
SALES:
OEM:
Capture 11% of tire sales for forecasted car production of 6.2 million cars
Car production forecast to grow 2.5% each year
Each car needs 4 tires (spare tires are undersized and do not count for analysis)
REPLACEMENT:
Capture 8% of replacement tire sales forecasted to be 32 million tires
Replacement tire market forecast to grow 2% each year
Assume all cash flows at end of year
PRODUCTION:
R & D COSTS: $10 million plus $5 million in test marketing
(R&D and test marketing already completed)
EQUIPMENT: $160 million
Can be sold for $65 million at end of project (end of Year 4)
Use 7-year MACRS depreciation schedule
PRICE INCREASE:
TAX RATE:
40%
INFLATION RATE:
3.25%
REQUIRED RETURN: 13.4%
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Works Cited
Ross, S., Westerfield, R., & Jaffe, J. (2013). Corporate Finance, 10th Edition. New York, NY: McGraw-Hill Companies, Inc.
Note: The preceding two cases are summaries of the mini cases in the Corporate Finance book. The summaries
were the first phase of completing the required analysis of the cases. These case summaries are offered,
instead of the full text of the cases, as to not infringe on the copyright of the owners or the book listed above.
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TO:
Client
FROM:
Brynn Curry
SUBJECT:
Financial Management Recommendations for Bethesda and Goodweek cases
Bethesda Case
The results of the analysis of the numbers for the potential strip mining project show that the internal rate of
return on the project is 13.30% which is more than the 12% required return. However, the present value of
the project is only $3.02 million. This present value is less than the amount of money made if the company
simply sold the land at the projected $5.5 million. The proposal’s offer was at a price of $82 per ton; the
breakeven amount to complete the project instead of sell the land is $84.71 which gives a present value of
$5,503,511.
Recommendations: We recommend that a counter-offer of more than $84.71 per ton be proposed to the
client. If the counter-offer is declined, we recommend selling the land for the $5.5 million.
Goodweek Case
The Goodweek project involves the question ‘should we invest in selling this new tire’ where the research,
development, and test marketing has already been completed.
The R & D and test marketing costs of the project are sunk costs as this investment has already been made.
The internal rate of return of the potential project is 26.32% which is significantly greater than the required
return of 13.40%. The profitability index is greater than 1 at 1.33 and the present value of the project is more
than $55.4 million. The payback period of the project is 2.72 years and the discounted payback period of the
project is 3.30 years.
Recommendations: The project is profitable and the internal rate of return is significantly more than the
required return so we recommend completing the project. The realization of the benefit of the project to our
investors doesn’t occur until after the 3.3 years of the discounted payback period.
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