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Case 2 – Capital Investment Decisions
[Chapter 8]
Bethesda Mining is a midsized coal mining company with 20 mines located in Ohio, Pennsylvania, West Virginia, and Kentucky. The company operates deep mines as well as strip mines. Most of the coal mined is sold under contract, with excess production sold on the spot market.
The coal mining industry, especially high-sulfur coal operations such as Bethesda, has been hard-hit by environmental regulations. Recently, 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 has just been approached by Mid-Ohio Electric Company with a request to supply coal for its electric generators for the next four years. Bethesda Mining does not have enough excess capacity at its existing mines to guarantee the contract. The company is considering opening a strip mine in Ohio on 5,000 acres of land purchased 10 years ago for $5.4 million. Based on a recent appraisal, the company feels it could receive $7.5 million on an aftertax basis if it sold the land today.
Strip mining is a process where the layers of topsoil above a coal vein are removed and the exposed coal is removed. Some time ago, the company would remove the coal and leave the land in an unusable condition. Changes in mining regulations now force a company to reclaim the land; that is, when the mining is completed, the land must be restored to near its original condition. The land can then be used for other purposes. As they are currently operating at full capacity, Bethesda will need to purchase additional equipment, which will cost $65 million.
The equipment will be depreciated on a seven-year MACRS schedule. The contract only runs for four years. At that time, the coal from the site will be entirely mined. The company feels that the equipment can be sold for 60 percent of its initial purchase price. However, Bethesda plans to open another strip mine at that time and will use the equipment at the new mine.
The contract calls for the delivery of 500,000 tons of coal per year at a price of $84 per ton. Bethesda Mining feels that coal production will be 750,000 tons, 810,000 tons, 830,000 tons, and 720,000 tons, respectively, over the next four years. The excess production will be sold in the spot market at an average of $95 per ton. Variable costs amount to $43 per ton and fixed costs are $5.2 million per year. The mine will require a net working capital investment of 5 percent of sales. The NWC will be built up in the year prior to the sales.
Bethesda will be responsible for reclaiming the land at termination of the mining. This will occur in Year 5. The company uses an outside company for reclamation of all the company’s strip mines. It is estimated the cost of reclamation will be $5.4 million. After the land is reclaimed, the company plans to donate the land to the state for use as a public park and recreation area as a condition to receive the necessary mining permits. This will occur in Year 5 and result in a charitable expense deduction of $7.5 million. Bethesda has a 21 percent tax rate and a required return of 12 percent on new strip mine projects. Assume a loss in any year will result in a tax credit.
Assignment Directions
Write a case analysis of 1,000 – 1,250 words (4 to 5 pages), content (title page and reference page not included) in proper APA format, covering the following requirements:
You have been approached by the president of the company with a request to analyze the project. Define, calculate, discuss, and use decision criteria to assess the investment using the following methods:
1. Payback period.
2. Profitability index
3. Net present value
4. Internal rate of return
Based on your analysis, should Bethesda Mining take the contract and open the mine? In your analysis, discuss the advantages and disadvantages of using each method for capital investment decisions. Discuss any other capital investment techniques that you would use to help you make a more informed decision. Are there any other variables that they should consider in their decision?
Submission Guidelines
Prepare this Assignment according to the APA guidelines, including a title page, an introduction, and a conclusion. An abstract is not required. Use intext citations and include a References section. A template is included in the Resources and Supports.
In your report, make certain that you include at least three (3) credible outside references from search engines or scholarly sources from the APUS Online Library.
Note that your attached paper will automatically be submitted to Turnitin, and an Originality Report should be sent back to the classroom within around 15 minutes. The Originality report does not actually recommend changes. It does point out where you may need to add a citation or quotation marks (if not already cited). Once you use it a few times, you will appreciate this tool, as it will assist you in improving quality and content, as well as avoiding plagiarism. Your goal is to keep direct quotations to a minimum and to make sure that you do not just cut and paste material. Ensure that all your references are cited. Students should strive for a TII report with a similarity index of less than 20%.
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Your paper will be evaluated according to the Writing Assignment Grading Rubric shown below. To maximize your grade, be sure to use the proper organization (intro, body, conclusion) and follow APA style. Your paper should have a title page and reference page, but you do not need an abstract for this assignment. See the PowerPoint presentation attached for APA assistance. This paper will be graded according to the FINC Graduate Grading Paper Rubric
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This Assignment aligns with the following:
Course Objective: 2 and 3 [content page]
Learning Objective: 2.1, 2.3, 3.1, 3.2, 3.3, 3.4, 3.5, and 3.6 [content page]
Resources and Supports
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Due on Aug 31, 2025 11:59 PM