Assignment #2 – Pickins Mining Case

Assigned Class 3 – Due 11:55pm on Sunday Week 5

75 Points – two page paper

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.

You may also include an Excel spreadsheet if you would like to show the calculations that way (in

addition to the paper part).

Students will be graded on their ability to cite examples from the text or websites (except

Wikipedia). Students are to follow the guidelines for two page papers (which means all papers

will have three sections: Introduction, Analysis and Conclusion). Place the answers to the

questions in the analysis (you can number them which would help the instructor grade it) and

make certain you have all the details for the calculations so the instructor can follow your

thoughts. All papers are to use APA standards and have at least three citations.

You must upload your file to Blackboard under Week 3 Assignments. Go to the Assignment, scroll

down to “Attach Local File” and click Browse to select YOUR file, then hit SUBMIT.

Evaluation Criteria for: Papers

14BElements of Paper-

– Individual

Assignments 1, and

2, 75 points each

WD

“A” 75 to 67.5 Points

Dev

“B” 67.4 to 60 Points

NSW

“C or lower”

59 to 52.5 Points or

lower

Introduction (10%)

Provides an interesting

introduction to the work.

Clearly states the

purpose of the work.

Provides a somewhat

clear introduction to the

work. Somewhat explains

the three to five main

points of analysis

Provides no clear

direction for the paper.

Does not explain the

three to five main points

of analysis to follow.

Analysis (50%)

Clearly and fully states

the problem and the

recommendation. Makes

a clear recommendation

for the future. Connects

Somewhat describes the

problem and the

recommendation. Makes

an unclear

recommendation. (Or

Provides no real clarity

or recommendation.

Does not make a clear

recommendation or

to concepts presented in

the texts and class

discussion.

may leave one or two of

these out). And

somewhat connects this

to the research, and the

texts.

show how this connects

to the research, text.

Conclusion (20%) Connects to the

introduction in an

interesting way. Is short

and encompasses all of

the main points in the

paper.

Brings in new ideas that

are not highlighted in the

paper. Somewhat

connects with the

introduction and the

analysis sections of the

paper.

Brings in new ideas that

are not highlighted in the

paper. Does not connect

with the introduction

and analysis sections of

the paper.

Grammar, Speech

Patterns,

Punctuation and

APA (20%)

Clearly uses proper

grammar, APA for in text

citations and for all

references. The paper is

interesting and easy to

read.

Has more than three

errors in APA, grammar

and or punctuation.

Has more than four

errors in APA, grammar

and or punctuation.

N S W = Needs Significant Work D = Developing WD = Well Developed

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