Finance 1 (EFB210) - Coal Mine Transportation Project Analysis Report

This report presents a financial analysis of two coal mine transportation options: rail and road haulage. The analysis employs the Net Present Value (NPV) method to evaluate the costs associated with each option over a 32-year project lifetime. The methodology involves categorizing cash flows into capital, annual, irregular, and terminal cash flows. The analysis reveals that the road haulage option has a lower overall present value of costs compared to the rail option, primarily due to differences in capital costs and haulage capacity. Based on the NPV analysis, the report recommends the road haulage option to the management of the organization. The appendix includes detailed quantitative data supporting the analysis and conclusions. The report also considers factors like variable costs, maintenance, fuel, and depreciation to arrive at a per-haulage cost comparison.

BUSINESS FINANCE

Summary
The company was exposed to two project proposals and required to
conduct the financial analysis of the options, to select one of the above. The Rail
option has been recommended based on the present values of the net inflows
and outflows of the proposals over the lifetime of the project that is 32 years.
Methodology
The methodology that has been employed for the evaluation of the
proposals was the analysis of the Net Present Value Method. It is imperative to
note that the Net Present Value refers to the net of the present values of the
varied cash flows arising at the various points of time over the life time of the
projects (Baker & English, 2011). It can be expressed in terms of the formula as
follows.
NPV= ∑
i=1
n CFi
(1+ d)i
= CF0 + CF1
(1+k )1 + CF2
(1+k )2 + …. + CF 3
(1+k )3
where:
CFi = net cash flow from year i,
CF0 = initial investment,
k = discount rate, and
n = nu
mber of years.
In the case of the project evaluation as per the NPV method for the
mutually exclusive projects, the one with the highest NPV or the least cost is
selected over the others (Gray, Larson & Desai, 2011). The reason for the
employment of the said technique is the superiority over others in context of the
time value of money (Brigham & Houston, 2012).
In the given scenarios, there is absence of the revenues arising from the
projects. Hence, the comparison of the total transportation cost is done to arrive
at the decision. It must be noted that the cost of capital as determined by the
management for the evaluation of the proposals is that of 10 percent. The cash

flows are categorised into 4 main categories namely the capital cash flows,
annual cash flows, irregular cash flows and the terminal cash flows. While the
total cost of the Rail transportation option has been computed out to be $
46,56,58,246, the total cost for the Road transportation option has been worked
out to be $ 41,25,16,572. Thus, the same has been presented in the form of the
cost per haulage. The cost per haulage has been worked out to be $ 53 and $ 65
for the Road and the Rail option respectively. The major difference in the cash
flows is arising due to the differences in the capital cost of the construction of
the railway tracks and the roads to the coalmine for the coal transportation. The
rail track construction cost is much higher. In addition, the difference in the per
haulage cost is due to the total haulage capacity as that of the combined 9
trucks and the single train.
Recommendation
On the basis of the analysis conducted in the previous parts, it can be
recommended to the management of the organisation to opt for the Road
Haulage option. This is because the overall present values of the costs to arise in
the proposal are lesser than the present values of the costs in the Rail Haulage
Option. The appendix provided below is descriptive of the quantitative analysis
of the both the transportation options of the entity.

References
Baker, H. K., & English, P. (2011). Capital Budgeting Valuation: Financial Analysis
for Today's Investment Projects. New Jersey: John Wiley & Sons Inc.
Brigham, E. F., & Houston, J. F. (2012). Fundamentals of Financial Management.
Boston MA: Cengage Learning.
Gray, C. F., Larson, E. W., & Desai, G. V. (2011). Project Management. The
Managerial Process. 4th ed. New Delhi: Tata McGraw Hill Education Pvt. Ltd.

Appendix
Road Haulage
Amount in $
Description
Initial outflows 0 8 16 24
Cost of Construction - Road 8,00,00,000
WorkingCapital 20,00,000
Prime Mover 1,35,00,000 1,35,00,000 1,35,00,000 1,35,00,000
Powered Dolly 1,35,00,000 1,35,00,000 1,35,00,000 1,35,00,000
Total 9,35,00,000 2,70,00,000 2,70,00,000 2,70,00,000
Present Values of Capital Costs 9,35,00,000 1,25,95,699 58,75,987 27,41,191
Sum of capital cash outflows 11,47,12,877
Variable Costs
Annual Maintenance Costs - Road 1,60,00,000
Annual Maintenance Costs- Trucks 9,00,000
Annual Fuel Costs 65,31,840
Salary Drivers 61,50,000
Depreciation- Road 25,00,000
Depreciation- Truck 33,75,000
Total cost 3,54,56,840
TaxBenefit @30% 1,06,37,052
Total cost after tax 2,48,19,788
Depreciation 58,75,000
Cash Outflows 3,06,94,788
Present Values of Annual cash flows 292410079.22
Irregular Cash Flows- Additional repair
Descriptions 4 12 20 28
Amount 45,00,000 45,00,000 45,00,000 45,00,000
Present Value 3073560.55 1433838.68 668896.33 312045.07
Sum of Present Values 5488340.63
Terminal Cash Flows
Descriptions
WorkingCapital 20,00,000
Present Values 94724.88
Total Cost of the option 41,25,16,572
Cost per haulage 53.05
Years
Annual Cash Flows - Total Annual Haulage - 77,76,000
Rail Haulage
Amount in $
Description Years
Initial outflows 0 16

Cost of Construction- Track 24,00,00,000
Working Capital 10,00,000
Locomotives Required 60,00,000 60,00,000
Carriages Required 1,00,00,000 1,00,00,000
Total
25,00,00,00
0
1,60,00,00
0
Present Values of Capital Costs
25,00,00,00
0 34,82,066
Sum of capital cash outflows
25,34,82,06
6
Annual Cash Flows - Total Annual Haulage -
72,00,000
Variable Costs
Annual Maintenance Costs Trains 10,00,000
Annual Maintenance Costs- Tracks 40,00,000
Annual Fuel Costs 16,12,800
Salary Drivers 18,00,000
Depreciation- Track 75,00,000
Depreciation- Trains 20,00,000
Total cost 1,79,12,800
Tax Benefit @30% 53,73,840
Total cost after tax 1,25,38,960
Depreciation 95,00,000
Cash Outflows 2,20,38,960
Present Values of Annual cash
flows
209951410.
63
Irregular Cash Flows-
Additional repair
Descriptions 8 24
Amount

40,00,000 40,00,000
Present Value 1866029.52 406102.39
Sum of Present Values
2272131.91
3
Terminal Cash Flows
Descriptions
Working Capital 10,00,000
Present Values 47362.44
Total Cost of the option
46,56,58,24
6
Cost per haulage 64.67