CHAPTER 7, 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 600,000 tons under
contract, and the rest on the spot market. The total sales revenue is the price per ton under contract
times 600,000 tons, plus the spot market sales times the spot market price. The sales per year will be:
Ye ar 1
Ye ar 2
Ye ar 3
Ye ar 4
Contract
$20,400,000
$20,400,000
$20,400,000
$20,400,000
Spot
2,000,000
5,000,000
8,400,000
5,600,000
Total
$22,400,000
$25,400,000
$28,800,000
$26,000,000
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
–$30,000,000
Land
–5,000,000
NWC
–1,120,000
Total
–$36,120,000
Now we can calculate the OCF each year. The OCF is:
Ye ar 1
Ye ar 2
Ye ar 3
Ye ar 4
Ye ar 5
Ye ar 6
Sales
$22,400,000
$25,400,000
$28,800,000
$26,000,000
Var. costs
8,450,000
9,425,000
10,530,000
9,620,000
Fixed costs
2,500,000
2,500,000
2,500,000
2,500,000
$4,000,000
$6,000,000
Dep.
4,290,000
7,350,000
5,250,000
3,750,000
EBT
$7,160,000
$6,125,000
$10,520,000
$10,130,000
–$4,000,000
–$6,000,000
Tax
2,720,800
2,327,500
3,997,600
3,849,400
–1,520,000
–2,280,000
Net income
$4,439,200
$3,797,500
$6,522,400
$6,280,600
–$2,480,000 –$3,720,000
+ Dep.
4,290,000
7,350,000
5,250,000
3,750,000
OCF
$8,729,200
$11,147,500
$11,772,400
$10,030,600
–$2,480,000
–$3,720,000