Question

Capital Budgeting Framework

Structure	Notes
Revenue
Operating Expenses	Can be fixed and/or variable
EBITDA	Earnings Before Interest, Tax, Depreciation and Amortisation
Depreciation	Reduces Taxable Income, is a deduction companies are entitled to due to loss in value of their assets (not applied to all assets)
Gain or Loss on Sale	= SV – BV where Book Value is the value of the asset on the books (Capital expenditure minus depreciation claimed up to and including the time of sale of the asset) if SV>BV it’s a gain, if SV<BV it’s a loss
EBIT	Earnings Before Interest and Tax
Tax	Tax always has the opposite sign of EBIT: if EBIT is positive you must pay tax, so tax is a negative CF; if EBIT is negative it will reduce total tax payable by the firm in that year, so tax is a positive CF (if it makes it easier, think of it as receiving a refund, not technically correct, but it can help)
NOPAT	Net Operating Profit after Tax
Add Back Depreciation	Cancelling the effect of depreciation as it isn’t a cash flow.
Add Back G/L on sale	Cancelling the effect of G/L on sale as it isn’t a cash flow.
Cash Flow from Operations
Capital Expenditure	The cost of purchasing a new asset/undertaking new investment
Changes in Working Capital	Capital to meet short-term funding needs (provides liquidity)
Salvage Value	The cash flow you receive from selling the asset (not the same as G/L on sale)
Free Cash Flows
Discount Factor	Simply (1+r)-t
PV of Cash Flows	Simply FCF x DF
NPV	Net Present Value (simply sum of all PV of CFs)

Overview[1]

Following the recent state and federal government approvals of a coal mine in Queensland, a representative of the mining company has approached you to undertake some preliminary financial analysis on their behalf.

The company, which plans to remain anonymous at this stage, wants you to evaluate the relative feasibility of two options for transporting coal from their mine pit to the railway line (approximately 80km) that will service the coal mine. With most mine-to-port/rail type analysis, the company understands that it can transport the coal by road (truck), conveyor or rail. However, given the distance to travel and limitations associated with the electricity infrastructure in the area, the company has limited its choices to either road or rail. Information on the road and rail transportation options is available in the ‘Information’ excel file provided.

Task

Based on the information provided, the representative has asked that you provide a detailed financial analysis of each transportation option. Use the framework above to create a discounted cash flow analysis, using relevant information from the excel below:

Data Notes Haulage Information Spreadsheet Mine Information Life (years) Production (tons p.a.). 32 7,200,000 Road Haulage Road Information Distance (kms) 80 It is assumed that all construction costs occur at the start of the project 1,000,000 200,000 Cost of Construction (per km) Annual Maintenance (per km) Life (years) Depreciation Salvage Value Straight Line Truck Information Number of Trucks Required Truck Type Outlay; Prime Mover (per truck) Outlay; Powered Dolly + 4 Haulage Trailers (per truck) Annual Fuel Costs (per truck) Annual Maintenance (per truck) Additional Maintenance Year 4 (per truck) Life (years) Depreciation Method Prime Mover + Powered Dolly + 4 Haulage Trailers 1,500,000 1,500,000 725,760 100,000 500,000 Straight Line

Answer 1

Book2 - Microsoft Excel Page Layout Formulas Data Review View Developer Consu Home Insert * Cut La Copy Paste Format Painter Clipboard A89 - 11 = = = Calibri BI U AutoSum" AT A - A A E Wrap Text Merge & Center - General $ - % 3 Insert Delete Format DA Cell Styles A r E Conditional Format Formatting as Table Styles , 8:09 2 Clear Sort & Filter Editing Find & Select Font Alignment Number Cells fic B F G H I J K L M N 32 Years 7200000 ton p.a. 1 Given: 2 Project 3 Life 4 Production 5 6 Distance 7 Cost of Construction 8 Annual Maintanence 9 Depreciation 10 Salvage Value 80 Kms 1000000 per km 200000 per Km Straight Line TRUCK Information Outlay Prime Mover Powered Dolly 1500000 X2 = 1500000 X2 = 3000000 3000000 6000000 Salvage Value Life 11 8 Years (Cost of Construction-Salvage Value)/Life of Project (1000000X80-0)/32 80000000/32 2500000 12 13 Depreciation of Project 14 15 16 17 18 Depreciation of Trucks 19 20 21 (Outlay- Salvage Value)/Life of Truck (6000000-0)/8 6000000/8 750000 2500000+750000 3250000 23 Total Deprecation 24 25 Sheet1 Sheet2 Ready 2 Activate Windows Go to PC settings to activate Windows. Sheet3 20 J 100% - . 0 * . 11:06 PM TU Illr 1/15/2020

3 Insert Delete Format AutoSum" AT A Eg Copy Paste 2 Clear Sort & Filter Editing Find & Select Cells H I J K L M N Consu Book2 - Microsoft Excel Home Insert Page Layout Formulas Data Review View Developer * Cut Calibri - 11 - A A = = = D Wrap Text General E DA Format Painter BI U A E E Merge & Center - $ % , 8:09 Conditional Format Cell Formatting as Table Styles Clipboard Font Alignment 0 Number Styles A24 of B F G 25 26 Particulars year (1-3) year(4-7) year (8-31) year 32 27 Annual Outlay 28 Annual Maintenance of Project 16000000 16000000 16000000 16000000 29 Annual Fuel in Truck 6531840 6531840 6531840 6531840 30 Annual Maintenance of Truck 900000 900000 900000 900000 31 Additional Maintenance of Truck 0 4500000 4500000 4500000 32 Annual Haulage of all Trucks 7776000 7776000 7776000 7776000 33 Annual Salary for 2 Drivers 300000 300000 300000 300000 34 Total Cost 31507840 36007840 36007840 36007840 35 Working Capital 2000000 0 -2000000 36 Cash Outflow 33507840 36007840 36007840 34007840 37 38 39 Rail Information 40 41 Distance 80 Kms Outlay 42 Cost of Construction 3000000 per Km Locomotive 3000000X2 = 43 Annual Maintanence 50000 per Km Carriage 200000X50 = 44 Depreciation Straight Line Total Outlay 45 Salvage Value 46 47 Depreciation of Project (Cost of Construction-Salvage Value)/Life of Project 48 (3000000X80-0)/32 49 240000000/32 Ke Sheet1 Sheet2 Sheet30 Ready 2 6000000 10000000 16000000 Activate Windows Go to PC settings to activate Windows. 000 100% . . 0 11:07 PM P 1/15/2020

Book2 - Microsoft Excel View Developer AutoSum" AT A Eg Copy D Wrap Text E Merge & Center - Alignment 3 Insert Delete Format Paste General $ % , Number DA Cell Styles E Conditional Format Formatting as Table Styles 8:09 2 Clear Sort & Filter Editing Find & Select Cells Consu Home Insert Page Layout Formulas Data Review * Cut Calibri - 11 - A A = = = Format Painter BI U A E Clipboard Font A250 fic B 62 Annual Fuel in Rail 1612800 63 Annual Maintenance of Rail 1000000 64 Additional Maintenance of Rail 0 65 Annual Haulage 7200000 66 Annual Salary for 4 Drivers 800000 67 Total Cost 14612800 68 Working Capital 1000000 69 Cash Outflow 13612800 C F G H I J K L M N 1612800 1000000 0 7200000 800000 14612800 D 1612800 1000000 4000000 7200000 800000 18612800 0 18612800 E 1612800 1000000 4000000 7200000 800000 18612800 -1000000 17612800 14612800 70 71 72 Particulars year (1-3) year(4-7) year (8-31) year 32 73 Cash Outflow of Truck 33507840 36007840 36007840 34007840 74 Cash Outflow of Rail 13612800 14612800 18612800 17612800 75 Saving 19895040 21395040 17395040 16395040 76 Less: Depreciation (8500000-3250000) 5250000 5250000 5250000 5250000 77 Earning before tax 14645040 16145040 12145040 11145040 78 Tax @ 30% 4393512 4843512 3643512 3343512 79 Earning After Tax 10251528 11301528 8501528 7801528 80 Add: Depreciation 5250000 5250000 5250000 5250000 81 Earning After Depreciation and Tax 15501528 16551528 13751528 13051528 82 Discount Factor @ 10% PVAF for 3 Year PVAF for(4-7) Year PVAF for(8-PVF for32 Year 83 Present Value 2.487 1.8684 4.6123 0.0474 84 Present Value 38552300.14 30924874.92 63426173 618642.4272 85 86 Sheet1 Sheet2 Sheet3 0 Ready Activate Windows Go to PC settings to activate Windows. 90 100% U . X TU . 0 11:08 PM . 1/15/2020

Book2 - Microsoft Excel Page Layout Formulas Data Review View Developer - Consu Home Insert * Cut La Copy Paste Format Painter Clipboard B900 - 11 - A A Σ AutoSum" Α Calibri BI U = = = S A E D Wrap Text Erä Merge & Center - Alignment 0 General $ - % , Number ,00 Conditional Format Formatting as Table Styles Cell Styles Insert Delete Format 2 Clear Sort & Filter Editing Find & Select Cells Font fic Н K L M 14612800 18612800 14612800 1000000 13612800 18612800 -1000000 17612800 14612800 18612800 67 Total Cost 68 Working Capital 69 Cash Outflow 70 71 72 Particulars 73 Cash Outflow of Truck 74 Cash Outflow of Rail 75 Saving 76 Less: Depreciation (8500000-3250000) 77 Earning before tax 78 Tax @ 30% 79 Earning After Tax 80 Add: Depreciation 81 Earning After Depreciation and Tax 82 Discount Factor @ 10% 83 Present Value 84 Present Value of Earning year (1-3) year(4-7) year (8-31) year 32 33507840 36007840 36007840 34007840 13612800 14612800 18612800 17612800 19895040 21395040 17395040 16395040 5250000 5250000 5250000 5250000 14645040 16145040 12145040 11145040 4393512 4843512' 3643512' 3343512 10251528 11301528 8501528 7801528 5250000 5250000 5250000 5250000 15501528 16551528 13751528 13051528 PVAF for 3 Year PVAF for(4-7) Year PVAF for(8-PVF for32 Year 2.487 1.8684 4.6123 0.0474 38552300.14 30924874.92 63426173 618642.4272 85 170000000 133521990.1 36478009.9 86 Calculation of NPV 87 Incremental Outflow (86000000 - 256000000) 88 Present Value of Earning 89 NPV 90 91 We Sheet1 Sheet2 Sheet3 Ready 2 Activate Windows Go to PC settings to activate Windows. 90 100% U • 100 11:14 PM PL 1/15/2020