Should Bethesda complete the project based on the following inputs and outputs of the project and its required rate of return? âCalculate the payback period, profitability index, net present value, and internal rate of return for the new strip mine.â (Ross, Westerfield, & Jaffe, 2013)
Numbers given:
PROPOSED 4 years
CONTRACT: 500,000 tons of coal per year at $82 per ton
PRODUCTION: Coal production would produce the following for 4 years, in order 620,000 tons 680,000 tons 730,000 tons 590,000 tons Variable cost: $31 per ton Fixed cost: $4.1 million per year Net working capital investment of 5% of sales to be built up in the year prior to sales Excess production can be sold on spot market for $76 per ton
LAND: Purchased for $5 million (10 years ago) Could sell for after-tax profit of $5.5 million If mined, land legally must be reclaimed: cost $2.7 million (this would be done year 5) If mined, land will be donated as Public Park with deduction of $6 million (year 6)
EQUIPMENT: cost $85 million Use 7-year MACRS depreciation schedule Equipment can be sold for 60% of its purchase price (after the 4-year contract is complete) However, Bethesda will use equipment in its next project
TAX RATE: 38% (assume that a loss in any year will result in a tax credit)
REQUIRED RETURN: 12%
Please show all calculations. Thank you.
Should Bethesda complete the project based on the following inputs and outputs of the project and its required rate of return? âCalculate the payback period, profitability index, net present value, and internal rate of return for the new strip mine.â (Ross, Westerfield, & Jaffe, 2013)
Numbers given:
PROPOSED 4 years
CONTRACT: 500,000 tons of coal per year at $82 per ton
PRODUCTION: Coal production would produce the following for 4 years, in order 620,000 tons 680,000 tons 730,000 tons 590,000 tons Variable cost: $31 per ton Fixed cost: $4.1 million per year Net working capital investment of 5% of sales to be built up in the year prior to sales Excess production can be sold on spot market for $76 per ton
LAND: Purchased for $5 million (10 years ago) Could sell for after-tax profit of $5.5 million If mined, land legally must be reclaimed: cost $2.7 million (this would be done year 5) If mined, land will be donated as Public Park with deduction of $6 million (year 6)
EQUIPMENT: cost $85 million Use 7-year MACRS depreciation schedule Equipment can be sold for 60% of its purchase price (after the 4-year contract is complete) However, Bethesda will use equipment in its next project
TAX RATE: 38% (assume that a loss in any year will result in a tax credit)
REQUIRED RETURN: 12%
Please show all calculations. Thank you.