Posted in | 1. Big Hole Mining Company (BH) has had most of its strip mining on hold for several years due to public opposition.While it’s difficult to |
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| accurately assess public opinion, management now believes reclaiming regulations and new technology have significantly reduced |
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| potential opposition, and that a new mine can be opened.They have asked you to do the following: |
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| A.Evaluate the project financials using the 15% BH standard corporate hurdle rate and the following assumptions: |
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| The mine would be on land bought 10 years ago for $6,000,000, but a recent appraisal valued the property at $3,400,000 after taxes. |
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| The sales contract for this mine runs for 4 years at which time the site will be entirely mined. |
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| The contract calls for the following tons at a fixed price of $35.00 per ton. |
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| YearTons (000) | ||||||||
| 1640 | ||||||||
| 2726 | ||||||||
| 3811 | ||||||||
| 4743 | ||||||||
| $25,000,000 of additional equipment will be needed immediately and will be on a 7 year MACRS depreciaton schedule. |
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| The equipment will be sold at the end of the sales contract for an estimated $14,700,000 after taxes. |
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| A net working capital investment of 5% of incremental sales will also be required, but it will be totally recovered in year 4. |
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| Variable costs are $13.00 per ton. |
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| Estimated fixed costs for the 4 year project life include the following: |
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| (Your interest ) Annual financing costs of $200,000 beginning in year 1. |
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| $450,000 spent to dateand $100,000 to be spent in year 1 for PR and support of local community. |
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| Other annual direct costs of $2,500,000 beginning in year 1. |
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| $500,000 of annual allocated general corporate overhead beginning in year 2. |
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| As required by government regulations, BH will reclaim the land at an after-tax cost of $4,000,000 in year 5 and $7,600,000 in year 6. |
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| It will then sell the land in year 6 for $1,000,000 after taxes. |
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| The tax rate is 38%. |
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| INPUT AREA |
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| ($000) | MACRS-7 YR | |||||||
| Land sale value-current (opportunity value) |
1 | |||||||
| Land salvage (sale) value | 2 | |||||||
| Equipment | 3 | |||||||
| Equipment salvage value | 4 | |||||||
| Net WC investment-% of incremental sales |
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| Price / ton | ||||||||
| Tons (Thousands): | ||||||||
| 1 | ||||||||
| 2 | ||||||||
| 3 | ||||||||
| 4 | ||||||||
| Variabe costs / ton | ||||||||
| Annual fixed costs | ||||||||
| Communication expense-year 1 |
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| Reclaim. Costs-year 5 | ||||||||
| Reclaim. Costs-year 6 | ||||||||
| Interest | ||||||||
| Tax rate | ||||||||
