Bethesda Mining is a midsized coal mining company with 20 mines located in Ohio, Pennsylvania, West Virginia, and Kentuc

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Bethesda Mining is a midsized coal mining company with 20 mineslocated in Ohio, Pennsylvania, West Virginia, and Kentucky. Thecompany operates deep mines as well as strip mines.Most of the coal mined is sold under contract, with excessproduction sold on the spot market.The coal mining industry, especially high-sulfur coal operationssuch as Bethesda, has been hard-hit by environmental regulations.Recently, however, a combination of increased demandfor coal and new pollution reduction technologies has led toimproved market demand for high-sulfur coal. Bethesda has just beenapproached by Mid-Ohio Electric Company with a requestto supply coal for its electric generators for the next four years.Bethesda Mining does not have enough excess capacity at itsexisting mines to guarantee the contract. The company isconsidering opening a strip mine in Ohio on 5000 acres of landpurchased 10 years ago for $4.2 million. Based on a recentappraisal, the company feels it could receive $6.7 million on anafter-taxbasis if it sold the land today.Strip mining is a process where the layers of topsoil above a coalvein are removed and the exposed coal is removed. Some time ago,the company would simply remove the coal and leave theland in an unusable condition. Changes in mining regulations nowforce a company to reclaim the land; that is, when the mining iscompleted, the land must be restored to near its originalcondition. The land can then be used for other purposes. Because itis currently operating at full capacity, Bethesda will need topurchase additional necessary equipment, which will cost$105 million. The equipment will be depreciated on a seven-yearMACRS schedule. The contract runs for only four years. At the timethe coal from the site will be entirely mined. Thecompany feels that the equipment can be sold for 60 percent of itsinitial purchase price. However, Bethesda plans to open anotherstrip mine at that time and will use the equipment at thenew mine.The contract calls for the delivery of 500,000 tons of coal peryear for $89 per ton. Bethesda Mining feels that coal productionwill be 660,000 tons, 720,000 tons, 760,000 tons, and620,000 tons, respectively, over the next four years. The excessproduction will be sold in the spot market at an average of $77 perton. Variable costs amount to $30 per ton, and fixedcosts are 4.1Miliion per year. The mine will require a net workingcapital investment of 5 percent of sales. The NWC will be built upin the year before the sales.Bethesda will be responsible for reclaiming the land at thetermination of the mining. This will occur in year 5.
The company uses an outside company for reclamation will be $2.4million. Afterthe land is reclaimed, the company plans to donate the land to thestate for use as a public park and recreation area. This will occurin year 6 and result in a charitable expense deduction of$7 million.
bethesda faces a 25 percent tax rate and has a 12 percentrequired return on new strip mine projects. Assume that a loss inany year will result in a tax credit.You have been approached by the president of the company with arequest to analyze the project. Calculate the payback period,profitability index, average accounting return, net presentvalue, internal rate of return, and modified internal rate ofreturn for the new strip mine. Should Bethesda Mining take thecontract and open the mine?