1
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:
, 2
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:
1. Prepare this Assignment according to the APA guidelines, including a title page, an introduction,
and a conclusion. An abstract required. Use in-text citations and include a References section.
2. In your report, make certain that you include at least eight (08) credible outside references from
search engines or scholarly academics and Journal sources.
Questions to Answer In This Deep Dive:
Assess the investment using the following methods: Payback period; Profitability index; Net present
value; Internal rate of return.
_____________________________________________________________________
Should Bethesda Mining take the contract and open the mine?
_________________________________________________________________________
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?
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:
, 2
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:
1. Prepare this Assignment according to the APA guidelines, including a title page, an introduction,
and a conclusion. An abstract required. Use in-text citations and include a References section.
2. In your report, make certain that you include at least eight (08) credible outside references from
search engines or scholarly academics and Journal sources.
Questions to Answer In This Deep Dive:
Assess the investment using the following methods: Payback period; Profitability index; Net present
value; Internal rate of return.
_____________________________________________________________________
Should Bethesda Mining take the contract and open the mine?
_________________________________________________________________________
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?
