BETHESDA MINING CASE STUDY
CHAPTER 6, Case #1
BETHESDA MINING
To analyze this project, we must calculate the incremental cash flows generated by the project. Since net working capital is built up ahead of sales, the initial cash flow depends in part on this cash outflow. So, we will begin by calculating sales. Each year, the company will sell 500,000 tons under contract, and the rest on the spot market. The total sales revenue is the price per ton under contract times 500,000 tons, plus the spot market sales times the spot market price. The sales per year will be:
Year 1
$47,500,000
10,800,000
$58,300,000
Contract
Spot
Total
Year 2
$47,500,000
16,200,000
$63,700,000
Year 3
$47,500,000
20,700,000
$68,200,000
Year 4
$47,500,000
8,100,000
$55,600,000
The current aftertax value of the land is an opportunity cost. The initial outlay for net working capital is the percentage required net working capital times Year 1 sales, or:
Initial net working capital = .05($22,400,000) = $1,120,000
So, the cash flow today is:
Equipment
Land
NWC
Total
–$85,000,000
–7,000,000
–2,915,000
–$94,915,000
Now we can calculate the OCF each year. The OCF is:
Sales
VC
FC
Dep.
EBT
Tax
NI
+ Dep.
OCF
Year 1
$58,300,000
19,220,000
4,300,000
12,155,000
$22,625,000
8,597,500
$14,027,500
12,155,000
$26,182,500
Year 2
$63,700,000
21,080,000
4,300,000
20,825,000
$17,495,000
6,648,100
$10,846,900
20,825,000
$31,671,900
Year 3
$68,200,000
22,630,000
4,300,000
14,875,000
$26,395,000
10,030,100
$16,364,900
14,875,000
$31,239,900
18
Year 4
$55,600,000
18,290,000
4,300,000
10,625,000
$22,385,000
8,506,300
$13,878,700
10,625,000
$24,503,700
Year 5
$2,800,000
Year 6
$7,500,000
–$2,800,000 –$7,500,000
1,064,000
2,850,000
–$1,736,000 –$4,650,000
0
0
–$1,736,000 –$4,650,000
Years 5 and 6 are of particular interest. Year 5 has an expense of $2.8 million to reclaim the land, and it is the only expense for
BETHESDA MINING
To analyze this project, we must calculate the incremental cash flows generated by the project. Since net working capital is built up ahead of sales, the initial cash flow depends in part on this cash outflow. So, we will begin by calculating sales. Each year, the company will sell 500,000 tons under contract, and the rest on the spot market. The total sales revenue is the price per ton under contract times 500,000 tons, plus the spot market sales times the spot market price. The sales per year will be:
Year 1
$47,500,000
10,800,000
$58,300,000
Contract
Spot
Total
Year 2
$47,500,000
16,200,000
$63,700,000
Year 3
$47,500,000
20,700,000
$68,200,000
Year 4
$47,500,000
8,100,000
$55,600,000
The current aftertax value of the land is an opportunity cost. The initial outlay for net working capital is the percentage required net working capital times Year 1 sales, or:
Initial net working capital = .05($22,400,000) = $1,120,000
So, the cash flow today is:
Equipment
Land
NWC
Total
–$85,000,000
–7,000,000
–2,915,000
–$94,915,000
Now we can calculate the OCF each year. The OCF is:
Sales
VC
FC
Dep.
EBT
Tax
NI
+ Dep.
OCF
Year 1
$58,300,000
19,220,000
4,300,000
12,155,000
$22,625,000
8,597,500
$14,027,500
12,155,000
$26,182,500
Year 2
$63,700,000
21,080,000
4,300,000
20,825,000
$17,495,000
6,648,100
$10,846,900
20,825,000
$31,671,900
Year 3
$68,200,000
22,630,000
4,300,000
14,875,000
$26,395,000
10,030,100
$16,364,900
14,875,000
$31,239,900
18
Year 4
$55,600,000
18,290,000
4,300,000
10,625,000
$22,385,000
8,506,300
$13,878,700
10,625,000
$24,503,700
Year 5
$2,800,000
Year 6
$7,500,000
–$2,800,000 –$7,500,000
1,064,000
2,850,000
–$1,736,000 –$4,650,000
0
0
–$1,736,000 –$4,650,000
Years 5 and 6 are of particular interest. Year 5 has an expense of $2.8 million to reclaim the land, and it is the only expense for