Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Corporate Finance Expert

Case study: Pickins Mining
 
Pickins Mining is a midsized coal mining company with 20 mines situated in Ohio, West Virginia and Kentucky. The company operates deep mines and also 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, though, 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 4-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 eliminated 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 the 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 require to purchase additional equipment, which will cost $46 million. The equipment will be depreciated on a 7-year MACRS schedule. The contract just 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. Though, 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 4-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 need a net working capital investment of 5 % of sales. The NWC will be built up in the year previous to the sales.
 
Pickins will be responsible for reclaiming the land at termination of the mining. This will takes place in Year 5. The company employs 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 take place in Year 6 and result in a charitable expense deduction of $7.5 million. Pickins faces a 38 % tax rate and has a 12 percent required return on new strip mine projects. Suppose a loss in any year will outcome in a tax credit.
 
You have been approached by the president of the company with a request to analyze the project. Compute the payback period, profitability index, net present value and internal rate of return for the new strip mine. You require to show all your computations. Should Pickins Mining take the contract and open the mine? describe in detail, showing computations, so the instructor can follow your thoughts. 

You might as well comprise an Excel spreadsheet if you would like to show the calculations that way (in addition to the paper part).

Students are to follow the guidelines for two page papers (which means that all papers will have three sections: Introduction, Analysis and Conclusion). Place the answers to the problems in the analysis and make certain you have all the details for the calculations. All papers are to use APA standards and have at least three citations.

Corporate Finance, Finance

  • Category:- Corporate Finance
  • Reference No.:- M91311
  • Price:- $40

Guranteed 36 Hours Delivery, In Price:- $40

Have any Question? 


Related Questions in Corporate Finance

1 you are in charge of preparing a comprehensive budget for

1. You are in charge of preparing a comprehensive budget for your firm. Indicate how financial ratios can help determine an acceptable comprehensive budget. 2. List four popular forms of graphs used by accountants. 3. Li ...

Assignmentthe company is nordstrom inc usaiii

Assignment The company is Nordstrom Inc. USA III. Justification: C. Financial impact. This section should discuss the project's most likely financial implications and the consolidated financial projection with and withou ...

1 how does a stocks expected price volatility affect the

1. How does a stock's expected price volatility affect the value of a call option on it? 2. In what ways are convertible securities and warrants similar? Dissimilar? 3. Why do companies issue convertible securities? 4. W ...

Analyze time norms-think back to a meeting you attended

Analyze time norms:- Think back to a meeting you attended recently-either at school or at a workplace. Did everyone arrive at the same time? How do you interpret the behavior of those who arrived first and last? Would yo ...

Create an online reacutesumeacute-transform your

Create an online résumé:- Transform your résumé to an online version. Upload files, for example, relevant reports and presentations you have completed. Include links to companies and organizations with which you have bee ...

Strategic alternativesluis garcia believed that inveravante

Strategic alternatives Luis Garcia believed that Inveravante had four main strategic alternatives in relation to its investment in Vetra: 1) Sell its participation (totally or partially) 2) Merge VESL with a listed compa ...

Adjust paragraph lengthread the following paragraph and

Adjust paragraph length Read the following paragraph and determine how it might be divided into two or more shorter paragraphs to help the reader follow the complex topic being discussed. Transforming a manuscript into a ...

1 what is meant by a participation loan what does the

1. What is meant by a participation loan? What does the lender participate in? Why would a lender want to make a participation loan? Why would an investor want to obtain a participation loan? 2. What criteria should be u ...

Finance 750 page paper and calculations in excelanalyze the

Finance 750 page paper and calculations in excel Analyze the case study, "Frank Smith Plumbing." Analyze the "Frank Smith Plumbing's Financial Statement" spreadsheet. Compare the cost of the truck to the cash flow record ...

1 explain the differences between transactional and

1. Explain the differences between transactional and relationship marketing. How do these differences lead to increasing emphasis on logistical performance in supply chain management? 2. Why are the four primary service ...

  • 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

Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro

Describe what you learned about the impact of economic

Describe what you learned about the impact of economic, social, and demographic trends affecting the US labor environmen