Bethesda Mining Company PDF

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NGUYỄN THỊ HÀ PHƯƠNG

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BÙI BÍCH PHƯƠNG

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DIỆP QUỐC BẢO PHƯƠNG

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Corporate Finance

Tutorial/Lecture:

CASE STUDY 1

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Từ Thị Kim Thoa

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BETHESDA MINING COMPANY September 16th, 08-Pages Due date: 2017

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CORPORATE FINANCE CASE STUDY 1: BETHESDA MINING COMPANY TEAM DIỆP QUỐC BẢO PHƯƠNG

3916ISB0012

BÙI BÍCH PHƯƠNG

3915ISB0130

NGUYỄN THỊ HÀ PHƯƠNG

3916ISB0021

VÕ THÀNH PHƯƠNG

3915ISB0131

CF-S317WSB-1

Lecture: Dr. Từ Thị Kim Thoa

September 16th, 2017

BETHESDA MINING COMPANY To be able to analyze the project, we need to calculate the project’s NPV, IRR, MIRR, Payback Period, and Profitability Index. 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: Years 1

2

3

4

Contract

$41,000,000

$41,000,000

$41,000,000

$41,000,000

Spot

$9,120,000

$13,680,000

$17,480,000

$6,840,000

Total

$50,120,000

$54,680,000

$58,480,000

$47,840,000

The current after-tax 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 = 0.05*($50,120,000) = $2,506,000 So, the cash flow today is: Equipment

–$85,000,000

Land

–5,500,000

NWC

–2,506,000

Total

–$93,006,000

Now we can calculate the OCF each year. The OCF is: Year 1

2

3

4

5

6

Annual Revenue

$50,120,000

$54,680,000

$58,480,000

$47,840,000

Less: Variable Costs

$19,220,000

$21,080,000

$22,630,000

$18,290,000

Less: Fixed Costs

$4,100,000

$4,100,000

$4,100,000

$4,100,000

$2,700,000

$6,000,000

Less: Depreciation

$12,146,500

$20,816,500

$14,866,500

$10,616,500

EBIT

$14,563,500

$8,683,500

$16,883,500

$14,833,500

($2,700,000) ($6,000,000)

Tax ( 38%)

$5,568,330

$3,299,730

$6,415,730

$5,636,730

($1,026,000) ($2,280,000)

Net Income

$9,085,170

$5,383,770

$10,467,770

$9,196,770

($1,674,000) ($3,720,000)

Add: Depreciation

$12,146,500

$20,816,500

$14,866,500

$10,616,500

OCF

$21,231,670

$26,200,270

$25,334,270

$19,813,270

($1,674,000) ($3,720,000)

Years 5 and 6 are of particular interest. Year 5 has an expense of $2,7 million to reclaim the land, and it is the only expense for the year. Taxes that year are a credit, an assumption given in the case. In Year 6, the charitable donation of the land is an expense, again resulting in a tax credit. The land does have an opportunity cost, but no information on the after-tax salvage value of the land is provided. The implicit assumption in this calculation is that the after-tax salvage value of the land in Year 6 is equal to the $6 million charitable expense.Next, we need to calculate the net working capital cash flow each year. NWC is 5 percent of next year’s sales, so the NWC requirement each year is:

Years

0

1

2

3

4

Beginning WC

$2,506,000

$2,734,000

$2,924,000

$2,392,000

Ending WC

$2,734,000

$2,924,000

$2,392,000

$0

NWC CF

($228,000)

($190,000)

$532,000

$2,392,000

5

6

The last cash flow we need to account for is the salvage value. The fact that the company is keeping the equipment for another project is irrelevant. The after-tax salvage value of the equipment should be used as the cost of equipment for the new project. In other words, the equipment could be sold after this project. Keeping the equipment is an opportunity cost associated with that project. The book value of the equipment is the original cost, minus the accumulated depreciation, or: Book value of equipment=$85,000,000– $12,146,500 – $20,816,500 – $14,866,500 – $10,616,500 Book value of equipment = $26,554,000 Since the market value of the equipment is $51 million(85 million*60%), the equipment is sold at a gain to book value, so the sale will incur the taxes of: Taxes on sale of equipment = ($51,000,000 – $26,554,000)*(0.38) = $ 9,289,480 And the after-tax salvage value of the equipment is: After-tax salvage value = $51,000,000 –$ 9,289,480 After-tax salvage value = $41,710,520 So, the net cash flows each year, including the operating cash flow, net working capital, and after-tax salvage value, are:

Years 0

1

2

3

4

5

6

Spending

($85,000,000)

$0

$0

$0

$41,710,520

$0

$0

Opportunity Cost

($5,500,000)

NWC

($2,506,000)

($228,000)

($190,000)

$532,000

$2,392,000

$21,231,670

$26,200,270

$25,334,270 $19,813,270

($1,674,000) ($3,720,000)

($93,006,000) $21,003,670

$26,010,270

$25,866,270 $63,915,790

($1,674,000) ($3,720,000)

Capital

OCF Total Project Cash Flow

Unrecovered cost at start of the year =21,003,670+26,010,270+25,866,270+ (93,006,000) = ($20,125,790) Payback period= 3 + $20,125,790/$22,205,270 Payback period = 3.91 years

Present Value of Future Cash Flows Initial Capital Outlay Profitability index = Profitability index =72,011,455.37/93,006,000 Profitability index = 0,77 The equation for IRR is:

$0 

 $36,120,000 $8,865,600 $11, 222,500 $12,333, 200 $26,798, 200  $2, 640, 000  $3,960,000       (1  IRR ) 0 (1  IRR )1 (1  IRR ) 2 (1 IRR ) 3 (1 IRR ) 4 (1 IRR ) 5 (1 IRR ) 6

I have calculated the IRR using Trial & Error as noted on the attached excel sheet, the IRR = 15.6%. MIRR = 13.39%

Years

OCF

0

1

2

3

4

($93,006,000)

$21,003,670

$26,010,270

$25,866,270

$22,205,270

18,753,277

20,808,216

18,475,907

14,143,484

5

6

($1,674,000) ($3,720,000)

PV Factor @ 12% PV NPV

1 -951,136.4

-93,006,000 -23,636,252

From the above,The project should be rejected due to the negative NPV. Payback period is nearly 4 years and Profitability index is less than 1

-1,860,000...