Bethesda Mining Company Essay

Words: 1605
Pages: 7

Bethesda Mining Company

Introduction Bethesda Mining is a midsized coal mining company with 20 mines located in Ohio, Pennsylvania, West Virginia, and Kentucky. Recently the coal mining industry has been impacted by environmental regulations that have presented challenges for the industry. However, a combination of increased demand for coal and new pollution reduction technologies has led to an improved market demand for high-sulfur coal. Bethesda is considering operating a new strip mine in Ohio on 5,000 acres of land it purchased 10 years ago for $5,300,000. Bethesda is currently operating at full capacity and if this project is undertaken will need to purchase additional equipment that will cost $34,000,000. The project
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Internal Rate of Return The internal rate of return is the rate that causes the net present value to equal zero. The internal rate of return (IRR) is the most significant alternative to the net present value (NPV) method. This is because the IRR is the closest value to the NPV, without actually being the NPV. An advantage to the IRR is that it provides a single number summarizing the merits of a project. This number does not depend on the interest rate of the capital market, but is intrinsic to the project and depends solely on the cash flows of the project. The general investment rule for a firm when using the internal rate of return is “Accept the project if the IRR is greater than the discount rate. Reject the project if the IRR is less than the discount rate.” There are several disadvantages with using the IRR approach to determine if a firm should accept or reject a project. The type of project, investing or financing, determines how the IRR rule should be used and interpreted. The investing type pays out money initially, whereas the financing type receives money first. The IRR rule is reversed with a financing type of project. This can cause confusion or misinterpretation of the rate and how it affects the project. Another disadvantage is if a project generates multiple rates of return. Multiple rates occur when an inflow and an