Should Bethesda complete the project based on the following inputs and outputs of the project and its required rate of return? âCalculate the payback period, profitability index, net present value, and internal rate of return for the new strip mine.â (Ross, Westerfield, & Jaffe, 2013)
Numbers given:
PROPOSED 4 years
CONTRACT: 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%
Please show all calculations. Thank you.
Should Bethesda complete the project based on the following inputs and outputs of the project and its required rate of return? âCalculate the payback period, profitability index, net present value, and internal rate of return for the new strip mine.â (Ross, Westerfield, & Jaffe, 2013)
Numbers given:
PROPOSED 4 years
CONTRACT: 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%
Please show all calculations. Thank you.
Related questions
Capstone Quarry is analyzing whether a new contract proposal will be a good idea. The relevant data is shown below. The net working capital will be paid in the same time period as the cost of the equipment and will be recovered at the end of the project. Remember to calculate the after-tax gain or loss of salvage as part of your terminal cash flow.
| Capstone Quarry Company Contract Analysis | |
| Amount of Rock Salt per Year | 23,000 Tons |
| Revenue per Ton | $ 145 |
| Cost of Equipment | $ 2,750,000 |
| Life(years) | 5 |
| MACRS Class | 5 |
| Fixed Cost per year | $ 475,000 |
| Var Cost/Ton | $ 85 |
| Actual Salvage | $ 105,000 |
| Change in NWC | $ 85,000 |
| Required Return | 12% |
| Tax Rate | 34% |
Find the cash flows for each year
Net present value
Payback period
Discounted payback
IRR
MIRR
Hint:
| Annual Cash Flows for Capstone Quarry | ||||||
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
| Initial Outlay | ||||||
| Unit Sales | ||||||
| Sales | ||||||
| Variable Costs | ||||||
| Fixed Costs | ||||||
| Depreciation | ||||||
| Taxable Cash Flows | ||||||
| Taxes | ||||||
| Add: Depreciation | ||||||
| Annual After-Tax Cash Flow | ||||||
| Terminal Cash Flow | ||||||
| Total Annual Cash Flows | ||||||
