· There has been an increased demand for coal and so, market demand has increased for high sulfur coal.
· Bethesda Mining Company has the option to either mine the land which they own for the next four years on contract or to sell it.
· If land is sold, they anticipate to receive 7.3 million after-tax.
bethesda mining co.
initial costs/salvage value of equipment
· bethesda will need to purchase additional equipment to mine the land - $49,000,000
· the company feels that equipment can be sold for 60% of its initial price
· salvage value of equipment = market value – book value * tax on salvage.
· [(49M*.60) - ($49M-32,971,000)] * (.38) = $24,037,706.00
· if land is sold they anticipate to receive $7.3 million on after-tax basis.
project cash flows
The computation of the project cash flows are reflected in the table below.
capital budgeting methods
· Analysis and Recommendations: The project should be accepted as it has a payback period that is less than the length of the project (four years). The profitability index is greater than 1 meaning that they will make 0.31 cents on each dollar they put into the...