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Finance 1 Essay

814 words - 3 pages

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CHAPTER 6, 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 500,000 tons under contract, and the rest on the spot market. The total sales revenue is the price per ton under contract times 500,000 tons, plus the spot market sales times the spot market price. The sales per year will be:
Year 1 Year 2 Year 3 Year 4 Contract $47,500,000 $47,500,000 $47,500,000 $47,500,000 Spot 10,800,000 16,200,000 20,700,000 8,100,000 Total $58,300,000 $63,700,000 $68,200,000 $55,600,000
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 -$85,000,000 Land -7,000,000 NWC -2,915,000 Total -$94,915,000
Now we can calculate the OCF each year. The OCF is: Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Sales $58,300,000 $63,700,000 $68,200,000 $55,600,000 VC 19,220,000 21,080,000 22,630,000 18,290,000 FC 4,300,000 4,300,000 4,300,000 4,300,000 $2,800,000 $7,500,000 Dep. 12,155,000 20,825,000 14,875,000 10,625,000 EBT $22,625,000 $17,495,000 $26,395,000 $22,385,000 -$2,800,000 -$7,500,000 Tax 8,597,500 6,648,100 10,030,100 8,506,300 1,064,000 2,850,000 NI $14,027,500 $10,846,900 $16,364,900 $13,878,700 -$1,736,000 -$4,650,000 + Dep. 12,155,000 20,825,000 14,875,000 10,625,000 0 0 OCF $26,182,500 $31,671,900 $31,239,900 $24,503,700 -$1,736,000 -$4,650,000

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Years 5 and 6 are of particular interest. Year 5 has an expense of $2.8 million to reclaim the land, and it is the only expense for the year. Taxes that year are a credit, an assumption given in the case. In Year 6, the charitable donation of the land is an expense, again resulting in a tax credit. The land does have an opportunity cost, but no information on the aftertax salvage value of the land is provided. The implicit assumption in this calculation is that the aftertax salvage value of the land in Year 6 is equal to the $7.5 million charitable expense.
Next, we need to calculate the net working capital cash flow each year. NWC is 5 percent of next
year's sales, so the NWC requirement each year is: Year 1 Year 2 Year 3 Year 4 Beg. NWC $2,915,000 $3,185,000 $3,410,000 $2,780,000 End NWC 3,185,000 3,410,000 2,780,000 NWC CF -$270,000 -$225,000...

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