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Bethesda Mining

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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 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

Contract Spot Total

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: 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 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 Year 6

Sales VC FC Dep. EBT Tax NI + Dep. OCF

$2,800,000

$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

18

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 the year.

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