Ask Question, Ask an Expert

+61-413 786 465

info@mywordsolution.com

Ask Corporate Finance Expert

Pickins Mining

Pickins Mining is a midsized coal mining company with 20 mines located in Ohio, West Virginia, and Kentucky. The company operates deep mines as well as strip mines. Most of the coal mined is sold under contract, with excess production sold on the spot market.

The coal mining industry, especially high-sulfur coal operations such as Pickins, has been hard-hit by environmental regulations. Recently, however, a combination of increased demand for coal and new pollution reduction technologies has led to an improved market demand for high-sulfur coal. Pickins has just been approached by Middle-Ohio Electric Company with a request to supply coal for its electric generators for the next four years. Pickins Mining does not have enough excess capacity at its existing mines to guarantee the contract. The company is considering opening a strip mine in Ohio on 5,000 acres of land purchased 10 years ago for $5.4 million.

Based on a recent appraisal, the company feels it could receive $7.5 million on an after-tax basis if it sold the land today.

Strip mining is a process where the layers of topsoil above a coal vein are removed and the exposed coal is removed. Some time ago, the company would simply remove the coal and leave the land in an unusable condition. Changes in mining regulations now force a company to reclaim the land. That is, when the mining is completed, the land must be restored to near its original condition. The land can then be used for other purposes. As they are currently operating at full capacity, Pickins will need to purchase additional equipment, which will cost $46 million. The equipment will be depreciated on a seven-year MACRS schedule. The contract only runs for four years. At that time the coal from the site will be entirely mined. The company feels that the equipment can be sold for 60 percent of its initial purchase price. However, Pickins plans to open another strip mine at that time and will use the equipment at the new mine.

The contract calls for the delivery of 450,000 tons of coal per year at a price of $65 per ton. Pickins Mining feels that coal production will be 770,000 tons, 830,000 tons, 850,000 tons, and 740,000 tons, respectively, over the next four years. The excess production will be sold in the spot market at an average of $82 per ton. Variable costs amount to $26 per ton and fixed costs are $3.9 million per year. The mine will require a net working capital investment of 5 percent of sales. The NWC will be built up in the year prior to the sales.

Pickins will be responsible for reclaiming the land at termination of the mining. This will occur in Year 5. The company uses an outside company for reclamation of all the company's strip mines. It is estimated the cost of reclamation will be $5.5 million. After the land is reclaimed, the company plans to donate the land to the state for use as a public park and recreation area. This will occur in Year 6 and result in a charitable expense deduction of $7.5 million. Pickins faces a 38 percent tax rate and has a 12 percent required return on new strip mine projects. Assume a loss in any year will result in a tax credit.

You have been approached by the president of the company with a request to analyze the project. Calculate the payback period, profitability index, net present value, and internal rate of return for the new strip mine. You need to show all your calculations. Should Pickins Mining take the contract and open the mine? Explain in detail, showing calculations, so the instructor can follow your thoughts.

Corporate Finance, Finance

  • Category:- Corporate Finance
  • Reference No.:- M9131985
  • Price:- $35

Priced at Now at $35, Verified Solution

Have any Question?


Related Questions in Corporate Finance

Graph an event study relationshipthe event in consideration

Graph an event study relationship. The event in consideration here is: "Environmental performance, being green, clean-tech, corporate sustainability, and many other "green" issues are on the forefront of the current econ ...

Assignment -topic - recent years have seen rapid

Assignment - Topic - Recent years have seen rapid development in Australia's housing market. The effect of high housing prices on Australian families is enormous. Despite those challenges, you would like to buy 3-bedroom ...

Assignment - pro forma financial statements external

Assignment - Pro forma financial statements, external capital needs and growth rates Pro-forma financials using percentage of sales method; 1. Obtain financial statements for a company for the last three years. The compa ...

1 explain the factors that determine beta and how an asset

1. Explain the factors that determine beta and how an asset beta can differ from equity betas. 2. Thornley Machines is considering a 3-year project with an initial cost of $618,000. The project will not directly produce ...

Financial modelling assignment -1 today is 1 january 2018

Financial Modelling Assignment - 1. Today is 1 January 2018. Jackson who is aged 80 has a portfolio which consists of three different types of financial instruments (henceforth referred to as instrument A, instrument B a ...

Assignment -are you able to produce a report as per the

Assignment - Are you able to produce a Report as per the given requirements please? Chosen company is Origin Energy (ORG). UAE The 2017 Annual Report. Instructions for the report - AASB 9 (and IFRS 9) Financial Instrumen ...

Q1 delta hedgingon sept 30th 2011 exxon mobil xom stock was

Q1 (Delta Hedging) On Sept 30th, 2011, Exxon Mobil (XOM) stock was traded at $72.63 while the December XOM put option with $75 exercise price is traded at $5.00 and the December XOM call option with $70 exercise price is ...

Assignment -task requirements you have been randomly

Assignment - Task requirements: You have been randomly assigned an Australian publicly listed company (refer to the separate excel spreadsheet provided to identify your company). Using the financial reports for your comp ...

Ethics and financial services assignment -learning outcome

Ethics and Financial Services Assignment - Learning Outcome - Apply ethical principles and decisionmaking models in arriving at a responsible and ethical judgement in routine and complex finance decisions Communicate the ...

Descriptionstudents are required to study undertake

Description: Students are required to study, undertake research, analyse and conduct academic work within the areas of corporate finance. The assignment should examine the main issues, including underlying theories, impl ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

Why might a bank avoid the use of interest rate swaps even

Why might a bank avoid the use of interest rate swaps, even when the institution is exposed to significant interest rate

Describe the difference between zero coupon bonds and

Describe the difference between zero coupon bonds and coupon bonds. Under what conditions will a coupon bond sell at a p

Compute the present value of an annuity of 880 per year

Compute the present value of an annuity of $ 880 per year for 16 years, given a discount rate of 6 percent per annum. As

Compute the present value of an 1150 payment made in ten

Compute the present value of an $1,150 payment made in ten years when the discount rate is 12 percent. (Do not round int

Compute the present value of an annuity of 699 per year

Compute the present value of an annuity of $ 699 per year for 19 years, given a discount rate of 6 percent per annum. As