Project Details:

4 yr contract for 500,000 tons of coal per year @ $82 per ton.
4 yr production in tons: 620,000, 680,000, 730,000, 590,000
Fixed cost: $4.1 million per year
Variable cost: $31 per ton
NWC: 5 percent of sales. The NWC will be built up in the year prior to the sales
Spot Sales of excess coal- $76 per ton
Land: Purchase cost $5 million, held ten years, after-tax sale (currently) $5.5 million
$2.7 million required reclamation at yr 5
Donation of land for $6 million deduction
Equipment cost of $85 million, 7 year MACRS depreciation
Equipment sale 60% of purchase price after completion of contract
Tax rate: 38%
Rate of return 12%

Total Unit Sales

Projected Revenue

620000
Year 0

Contract Price per Unit

Contract Unit Sales
Total Contract Sales
Spot Price per Unit
Spot Unit Sales
Total Spot Sales
Total Sales
Operating Cash Flows
Unit Sales
Variable Cost ($31/ton)
Fixed Cost
Reclamation & Land donation
Depreciation
Earnings before Taxes (EBT)
Taxes
Net income
Depreciation
Total Operating Cash Flows

Year 1
$82.00
500,000
41,000,000.00
$76.00
120,000
9,120,000.00
$50,120,000.00

620000
($19,220,000.00)
($4,100,000.00)
$0.00
($12,146,500.00)
$14,653,500.00
($5,568,330.00)
$9,085,170.00
$12,146,500.00
$21,231,670.00

Investment Cash Flows

Equipment
Land (opportunity cost)
Net Working Capital
Beginning NWC
Ending NWC
Net Working Capital cash flow
Total Investment Cash Flows

($85,000,000.00)
($5,500,000.00)

$0.00

$2,506,000.00
($2,506,000.00)
($93,006,000.00)

$2,506,000.00
$2,734,000.00
($228,000.00)
($228,000.00)

($93,006,000.00)
($93,006,000.00)

$21,231,670.00
($228,000.00)
$21,003,670.00

Projected Total Cash Flow

Operating cash flow
Investment Cash Flows
Total project cash flow
Assumptions
Required Return
Tax Rate
Net Present Value
Internal Rate of Return

12.00%
38.00%
$5,718,491.29 Do not accept project as the NPV is
14.39%

Profitability Index
=
=

PV of cash flows subsequent to initial investment

Initial investment
Profitability Index =

-1.06

680000

730000

590000

Year 2
$82.00
500,000
41,000,000.00
$76.00
180,000
13,680,000.00
$54,680,000.00

Year 3
$82.00
500,000
41,000,000.00
$76.00
230,000
17,480,000.00
$58,480,000.00

Year 4
$82.00
500,000
41,000,000.00
$76.00
90,000
6,840,000.00
$47,840,000.00

680000
($21,080,000.00)
($4,100,000.00)
$0.00
($20,816,500.00)
$8,683,500.00
($3,299,730.00)
$5,383,770.00
$20,816,500.00
$26,200,270.00

730000
($22,630,000.00)
($4,100,000.00)
$0.00
($14,866,500.00)
$16,883,500.00
($6,415,730.00)
$10,467,770.00
$14,866,500.00
$25,334,270.00

590000
($18,290,000.00)
($4,100,000.00)
$0.00
($10,616,500.00)
$14,833,500.00
($5,636,730.00)
$9,196,770.00
$10,616,500.00
$19,813,270.00

$0.00

$0.00

$41,710,520.00

$2,734,000.00
$2,924,000.00
($190,000.00)
($190,000.00)

$2,924,000.00
$2,392,000.00
$532,000.00
$532,000.00

$2,392,000.00
$0.00
$2,392,000.00
$44,102,520.00

$26,200,270.00
($190,000.00)
$26,010,270.00

$25,334,270.00
$532,000.00
$25,866,270.00

$19,813,270.00
$44,102,520.00
$63,915,790.00

Reclamation

pt project as the NPV is less than the sale price of the land.

Year 5

($2,700,000.00)
($2,700,000.00)
$1,026,000.00
($1,674,000.00)
$0.00
($1,674,000.00)

($1,674,000.00)
($1,674,000.00)

Sale of land
Year 6
MACRS Depreciation Schedule
Year
3 year
1
33.33%
2
44.45%
3
14.81%
4
7.41%
Equipment book value
$85,000,000.00
($58,446,000.00)
$26,554,000.00
($6,000,000.00)
($6,000,000.00)
$2,280,000.00
($3,720,000.00)
$0.00
($3,720,000.00)

$2,280,000.00
$2,280,000.00

$51,000,000.00
$24,446,000.00
$9,289,480.00
$41,710,520.00

5 year

7 year
20.00%
32.00%
19.20%
11.52%

purchase
accum dep
book
sale price
taxable gain
tax on gain
cf from sale

10 year
14.29%
10.00%
24.49%
18.00%
17.49%
14.40%
12.49%
11.52%