Business Case: BETHESDA MINING COMPANY
Overview and Assumptions
Bethesda Mining is a coal mining business having mining grounds spanning Ohio, Pennsylvania, West Virginia and Kentucky. The business offers its goods on the contract or on the market. Mid-Ohio Electric Business recently contacted the company for a contractual supply of 500 tons of coal for a term of four years. The business currently has not enough charcoals in its mines to get into the deal. However, the business has another alternative to examine and maybe to conclude the deal. Bethesda Company has 5,000 acres of property bought for 5,4 million years ago in Ohio. The land is now assessed at 7.3 million. The firm plans to establish mines on 5,000 acres of land for contract service. In line with the 4-year contract, the firm forecasts that it will produce 750,000 tons in the 1st year, 810,000 tons in the 2nd year, 830,000 tons in the 1st year and 720,000 tons in the 4th year.
In all four years of the contract, there is an excess of coal production. The four-year surplus amounts to 250,000, 31,000, 330,000 and 2200,000 tons. It sells the surplus goods on the spot in accordance with the company’s instruction. The deal stipulated 70 dollars per ton. Therefore, it implies that the business will sail annually on the contract revenues (500 000*70)=35000000. The surplus production is sold on the spot for $64. The Company must thus in the first year generate a turnover of (250000*64)=16000000, in the second year (310000*64)=190000, a third-year income of (330000*64)=210000, and in the fourth year, it is to get (220000*64)=140000. Other factors should be established such as depreciation, fixed costs, taxation, etc. But if all the factors are considered, the business earns a large profit compared to selling the land. Therefore, the business should accept the job in my view.
Project Cash Flows
Cash flow is the overall sum involved in the project and impacts liquidity (Copeland, 2010). In this case, I have examined all the money that is expected to be involved for the project from the beginning stage to the end phase of the project, including reclamation and gift to the government. The cash flows are favorable, and the business should thus undertake the project.
Capital Budgeting Techniques and Computations
According to (De Motta, 2013), capital budgeting techniques are utilized to evaluate the feasibility of investment such as new engine, project, etc. Various techniques are used to calculate the capital budget.
Because the project’s payback time is 2,93 years, the project is considered viable. The original capital expenditure spent in the project will probably be earned before four years. Therefore, the remaining term inside four years will be to make a profit in addition to the original capital expenditure spent in the project in which the business participates. The results also reflect the fixed and variable expenses of the business throughout its operations.
The profitability index is 1.33 further demonstrates the viability of the idea. A suitable index of profitability must have a positive value (Henderson, 2015). It thus indicates that the income Bethesda Mining is expected to get from the project is far greater than the expenditure invested in the project. Therefore, resources need to be allocated to generate big profits in the project.
The project has a positive net present value $16,334,242 as well. It shows thus that the owners of the business are likely to recover back their money and profits from the project (Henderson, 2015). It also indicates that the project exhibits fewer possibilities of hazards in the activities it involves. Managers may thus earn huge sales and profits from the initiative. The possibilities of losses resulting from the initiative are likewise quite low.
Impact of a carbon tax in Ohio
Ohio State researchers believe that carbon price would be more efficient than either renewable or production tax credits (Kowalski., 2021).
The analyses released by researchers from Ohio State University highlighted the difference between what would be economically less expensive and how lawmakers preferred twisted climate change measures. The USA has thus far shied away from a carbon tax. Under tax, the price of fossil fuel would rise to reflect the health, climate and other social consequences now shifting polluters to the public.
Business merits and Social impacts
Business merits and an examination of social impacts are utilized to modify the different value sets using different formulae to investigate various possible outcomes and quantify factors considered using sensitivity analysis and scenario analysis. In this instance various techniques and scenarios were used to determine the best choice between selling the property and contracting. The business is secure to take the project and earn profits rather than sell land based on all the situations and techniques utilized.
Rationale and Recommendation
I have stated throughout that the business should accept the project and not sell the land. There are many reasons for accepting the project. First of all, the business owns the property they may use for the mining. It is extremely hard to acquire land with coal reserves and the business consequently has the advantage of owning a property of 5000 hectares. When you compare the price of the sale and use of the property, use the land for the project is more advantageous. The business got just $7.3 million shillings. The project is expected to take four years, though. The business receives income of $35 million year from the deal, totaling $140 million. Excess outputs are sold on the market every year equal to little more than $71 million. The business will earn a profit of $18million, after the evaluation of all the other factors in the project, for example, depreciation, reclamation costs, taxation etc. This amounts to $7.3 million, which the firm would have had to sell. The concrete advantages the business gets are the amount of money invested. A lot of money is eighteen million dollars, compared to 7,3 million dollars. The customer’s specification may be called an intangible advantage. The business can fulfil the amount requested by the Electric Company of Mid-Ohio. Finally, when managed and served properly, the customer is pleased. The acceptance of the project and the delivery of the sum needed at the contract price will please the customer. Another type of intangible gain is customer satisfaction.
