Bethesda Mining Company
Bethesda Mining Company
02/24/2011
Introduction Bethesda Mining is a midsized coal mining company with 20 mines located in Ohio, Pennsylvania, West Virginia, and Kentucky. Recently the coal mining industry has been impacted by environmental regulations that have presented challenges for the industry. However, a combination of increased demand for coal and new pollution reduction technologies has led to an improved market demand for high-sulfur coal. Bethesda is considering operating a new strip mine in Ohio on 5,000 acres of land it purchased 10 years ago for $5,300,000. Bethesda is currently operating at full capacity and if this project is undertaken will need to purchase additional equipment that will cost $34,000,000. The project will provide a four-year contract that calls for the delivery of 400,000 tons of coal per year at a price of $50 per ton. At the end of the mining at the site, Bethesda will be responsible for reclaiming the land. After the land is reclaimed, the company plans to donate the land to the state for use as a public park and recreation area and receive a charitable expense deduction of $6,000,000. The purpose of this paper is to analyze the project through calculating the payback period, profitability index, average accounting return, net present value, internal rate of return, and modified internal rate of return for the new strip mine. Based on these calculations, it will be determined whether Bethesda should take the contract and open the mine or pursue other opportunities.
The Payback Period The payback period method calculates the time it takes for a project to “pay back” its initial investment. The period is usually reflected in terms of number of years. Management sets the minimum acceptance criteria for how long it feels appropriate for the project to take before it starts paying for itself. The advantages to this method are that it is easy to understand and is biased towards liquidity. The disadvantages to this method
02/24/2011
Introduction Bethesda Mining is a midsized coal mining company with 20 mines located in Ohio, Pennsylvania, West Virginia, and Kentucky. Recently the coal mining industry has been impacted by environmental regulations that have presented challenges for the industry. However, a combination of increased demand for coal and new pollution reduction technologies has led to an improved market demand for high-sulfur coal. Bethesda is considering operating a new strip mine in Ohio on 5,000 acres of land it purchased 10 years ago for $5,300,000. Bethesda is currently operating at full capacity and if this project is undertaken will need to purchase additional equipment that will cost $34,000,000. The project will provide a four-year contract that calls for the delivery of 400,000 tons of coal per year at a price of $50 per ton. At the end of the mining at the site, Bethesda will be responsible for reclaiming the land. After the land is reclaimed, the company plans to donate the land to the state for use as a public park and recreation area and receive a charitable expense deduction of $6,000,000. The purpose of this paper is to analyze the project through calculating the payback period, profitability index, average accounting return, net present value, internal rate of return, and modified internal rate of return for the new strip mine. Based on these calculations, it will be determined whether Bethesda should take the contract and open the mine or pursue other opportunities.
The Payback Period The payback period method calculates the time it takes for a project to “pay back” its initial investment. The period is usually reflected in terms of number of years. Management sets the minimum acceptance criteria for how long it feels appropriate for the project to take before it starts paying for itself. The advantages to this method are that it is easy to understand and is biased towards liquidity. The disadvantages to this method