Mini Case Study-Bethesda Mining
Mini-Case Study: Bethesda Mining Company Week 4 Application 2
Jo-Ann Savoie
Walden University
Finance: Fiscal Leadership in a Global Environment
DDBA-8140-2
Dr. Guerman Kornilov
March 24, 2011 The following Mini-Case on Bethesda Mining Company was taken from the text corporate finance (2010, P. 203-204). In order to determine if Bethesda Mine should open, a thorough analysis of the payback period, profitability index, average accounting return, net present value, internal rate of return, and the modified internal rate of return have been conducted.
Table 1. Cash flow on Investment
Tax rate= 38% Year 0 Cash flow (outflow) on investment Opportunity cost of using land= $7,000,000
Cost of equipment= $85,000,000
Total $92,000,000
Table 2. MACRS 7-Year Schedule
MACRS 7 years schedule
Year Depreciation
1 14.29%
2 24.49%
3 17.49%
4 12.49%
5 8.93%
6 8.92%
7 8.93%
8 4.46% 100.00%
(Table retrieved from Small Business Taxes & ManagementTM Copyright 2011, A/N Group, Inc.)
Table 3. Cost of Equipment Valued at a Four -Year Depreciation Rate
Cost of equipment= $85,000,000 Year Depreciation % Depreciation
1 14.29% $12,146,500 =14.29% x $85,000,000
2 24.49% $20,816,500 =24.49% x $85,000,000
3 17.49% $14,866,500 =17.49% x $85,000,000
4 12.49% $10,616,500 =12.49% x $85,000,000 68.76% $58,446,000 The book value after the four-year period is valued at $26,554,000. This figure was achieved by taking the initial value of $85,000,000 minus the four- year depreciation value of $58,446,000. The market value of the equipment at the end of the four- year at 60% of purchase is $51,000,000 (60% x 85,000,000).
Table 4. After Tax Cash Inflow on Sale of the Equipment
Sale Price= $51,000,000
Book value= $26,554,000
Profit= $24,446,000
Tax @ 38% = $9,289,480 =38% x $24,446,000 After tax cash inflow on sale of equipment=
Jo-Ann Savoie
Walden University
Finance: Fiscal Leadership in a Global Environment
DDBA-8140-2
Dr. Guerman Kornilov
March 24, 2011 The following Mini-Case on Bethesda Mining Company was taken from the text corporate finance (2010, P. 203-204). In order to determine if Bethesda Mine should open, a thorough analysis of the payback period, profitability index, average accounting return, net present value, internal rate of return, and the modified internal rate of return have been conducted.
Table 1. Cash flow on Investment
Tax rate= 38% Year 0 Cash flow (outflow) on investment Opportunity cost of using land= $7,000,000
Cost of equipment= $85,000,000
Total $92,000,000
Table 2. MACRS 7-Year Schedule
MACRS 7 years schedule
Year Depreciation
1 14.29%
2 24.49%
3 17.49%
4 12.49%
5 8.93%
6 8.92%
7 8.93%
8 4.46% 100.00%
(Table retrieved from Small Business Taxes & ManagementTM Copyright 2011, A/N Group, Inc.)
Table 3. Cost of Equipment Valued at a Four -Year Depreciation Rate
Cost of equipment= $85,000,000 Year Depreciation % Depreciation
1 14.29% $12,146,500 =14.29% x $85,000,000
2 24.49% $20,816,500 =24.49% x $85,000,000
3 17.49% $14,866,500 =17.49% x $85,000,000
4 12.49% $10,616,500 =12.49% x $85,000,000 68.76% $58,446,000 The book value after the four-year period is valued at $26,554,000. This figure was achieved by taking the initial value of $85,000,000 minus the four- year depreciation value of $58,446,000. The market value of the equipment at the end of the four- year at 60% of purchase is $51,000,000 (60% x 85,000,000).
Table 4. After Tax Cash Inflow on Sale of the Equipment
Sale Price= $51,000,000
Book value= $26,554,000
Profit= $24,446,000
Tax @ 38% = $9,289,480 =38% x $24,446,000 After tax cash inflow on sale of equipment=
References: Ross, S. A., Westerfield, R. W., & Jaffe, J. (2008). Corporate finance (8th ed.). New York: McGraw-Hill Irwin. Small Business Management™ (2011). Federal depreciation rates. Retrieved from http://www.smbiz.com/sbrl012.html