Question:Scott McCarthy wrote this case solely to provide material for class discussion. The author does not intend to illustrate either effectiveor ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information toprotect confidentialityThis is by no means my question, it was given in class as a case study and i hope course hero can help me solve it.THE COMPANYIn 2001, a Queensland company, Zeta Mining (Zeta), was formed with the objective of mining the coalresources of the Bowen Basin in Central Queensland, Australia. Since then, Zeta had become one of theworld’s largest producers of metallurgical coal, operating a number of open-cut mines in the BowenBasin. The mines were estimated to produce 6,000 million tonnes of coal over the next 120 years. Used inthe manufacture of steel, the coal that was sold offshore was shipped from the company-owned coalterminal, which loaded about 450 ships per year for 70 customers in more than 20 countries. The majorexport destinations were Japan, South Korea, China and IndiaThe company’s investment in the area was estimated at about $8 billion and included machineryaccommodation, high voltage infrastructure, ports, water management, roads and tailings managementOne of the most important and expensive pieces of machinery used on the mines were the draglines. In2012, Zeta used the net present value (NPV) methodology to determine whether to “walk” one of itsdraglines to another mineTHE SETTINGDraglines are used to remove the mine overburden, that is, the dirt, rock and other geological waste sittingon top of the coal. The dragline buckets can hold up to 400 tonnes. The draglines are imported from theUnited States, shipped by sea to Mackay or Gladstone. The components are then transported by road to aspecially built pad near the mine to operate the dragline, which is then put together on site. The assemblycan take up to eight months and requires a specialist assembly crew of 40 people. From the time Zetadecides to purchase a new machine, it can be up to two and a half years unti it is ready to be put to useThe draglines weigh about 3,400 tonnes and have a top speed of just 120 metres per hour. A new draglinecan cost approximately $220 million, including fabrication, transport and assemblyRecently, Zeta needed to decide where the dragline originally intended for the southern pit of the NewFind mine could be situated after a change in the mine plan meant that that pit would not be advancing for another 10 years and the dragline was thus no longer required there. Because this change involvedincreasing production in the northern pit, earthmoving and mining equipment had to he relocated there.To “walk” the dragline the six kilometres to the northern pit, it had to cross two public roads and arailway line owned and operated by Aurizon (formerly Queensland Rail),2 The trains using the trackswere electric and were powered through lines running above the trains and parallel with the tracks. Thetraffic on the roads could be temporarily controlled and diverted at minimal cost, causing only minimalinconvenience to public traffic. The rail crossing was much more problematic because Aurizon wouldonly permit the train line, power lines and all supporting materials (sleepers, rock ballast andnetwork/communication cabling) to be out of service for 48 hours. Potentially, Zeta would be subject tosignificant fines if the track was out of commission for any time above the 48 hours, including anyinterference caused by inclement weatherTHE DETAILSAs Zeta’s project evaluation director for the sector that included the New Find mine, Connor Horwill’srole was to financially analyze the project and to recommend whether Zeta should undertake the task ofmoving the dragline. Zeta’s policy was to use the NPV model on such large-scale projects and have theproject evaluation director present a recommendation to the chief financial officer (CFO) of the entireBowen Basin area. The CFO would then consider the NPV result together with any other relevant factorsand make a final decision about the project.Horwill had total authority in determining the appropriate cash flows for the NPV model. These weregenerated by his team in conjunction with various other departments. He calculated the cost of movingthe dragline, building temporary roads and removing and replacing the railway lines and power at S10million. The discount rate to be used in the analysis was determined at a higher company level using theweighted average cost of capital (WACC) model. Like many large corporations, Zeta used a wholecompany based WACC plus a premium for country risk. In any case, Horwill was simply given the ratel comparison analysis by balancing the business case optimized withf alternatives to moving the dragline. Only two alternatives wereby the CFO to use in all analyses; for this project, it was 9 per cent. Further, Horwill was directed toconsider the project as an incremental comparison analysis by balancing the business case optimized with the investment with the business case optimized without the investment. This approach required Horwill and his team to identify a number of alternatives to moving the dragline. Only two alternatives were considered viable: using the contractor’s excavator and truck fleet to strip out the overburden orpurchasing another dragline and assembling it near the northern pit. After further consideration, the new dragline alternative was dismissed because of the significant capital and time required before itoperational. While the contractor model was far more labour intensive, at the appropriate level of staffing it could achieve the same rate of removal of overburden as the dragline. It was estimated for the analysis that all the overburden would be removed after a five-year period. (Coal extraction in the pit could begin about three months after stripping was completed.) The pit would have a useful revenue generating life of approximately 25 years after this five-year periodContractor stripping was often used when draglines were not feasible because of where the mine wasor specific issues, such as the mine’s unstable footings. This approach also had two clearadvantages since Zeta had previously used contractors on other sites: first, their induction costs low: and second, the contractors could be employed without having to go to tender. Horwill’s projectevaluation team determined induction expenses Which were tax deductible at the company tax rate of 30per cent) to be $1 million in Year 1 and a further $250,000 in Years 3 and 5. Using contractors wouldallow Zeta to immediately sell the dragline for S19 million with payment received in two instalments of50 per cent each. The first payment would be received at the end of the first year and the second payment 12 months later. The current book value of the dragline was zero as a result of an attractive depreciationand investment allowance offered to the mining industry. Any tax payable on disposal of the dragline was to be included in the analysis when the cash was received.The contractor contract was casual and could be suspended by Zeta at any time. For instance, Zeta mightdecide that coal prices or significant exchange rate movements made the mine uneconomical. The cost of employing the contractors comprised three tax deductible parts: an hourly rate per contractor, a flat fee per year and an initial upfront engagement fee. The hourly rate accorded with the contractor’s level, whether as labourer or supervisor. (The estimated labour hours required to work at the same rate ofremoval as the dragline would cost are shown in Exhibit 1. The rates of pay for labourers are shown inExhibit 2, while supervisors costtotal labour cost for the year (excluding the engagement fee) but covered the cost of fuel, maintenanceand other expenses for the contractor. The engagement fee of $750,000, a significant expense for Zeta,arose because of the casual nature of the contract. The fee was payable immediately, and no part of it wasrefundable no matter how long the contract remained in placean extra S15 per hour.) The flat fee per year was set at 15 per cent of theThe dragline required some modifications owing to the slightly different configuration of the northern pit.Because this pit shared its eastern border with a major public road. excavation depth on that side wasrestricted. This meant that the roads descending into the pit had to be steeper and narrower, requiringsteering and suspension adjustments at an immediate cost of S1.100.000. Ongoing maintenance wasS300,000 per year with an additional major service of $150.000ing required in Year 3. An annualsalary of $260,000 was payable to the dragline operator, while fuel, oil and other runningestimated at $2 million per year. Both these figures were forecast to grow at 10 per cent per year. Theadjustments to the dragline, the ongoing maintenance and major service costs, operator salary, all runningcosts and the up-front costs associated with “walking” the dragline were all tax deductible. Horwillestimated that, during the five-year period to remove the overburden, if the mine was mothballed for anyreason, it could be sold at approximately $4 million less per year off the current sale price. At the end ofthe five-year period, the dragline would have just scrap value and hence would not be considered in theanalysis. As a community service, the dragline could be donated to the local council as part of a touristattraction to promote the significance of the mines to the local district.THE DECISIONHorwill was instructed by the CFO to have a recommendation to her within the next month. While shemade it clear that the final decision would take into account various other factors, his recommendationshould be based solely on the NPV analysis.EXHIBIT 1: CONTRACTOR HOURS PER YEARContractor Year 1 2Labourer80,000 80,00090,000 90,000 100,000Supervisor 12,000 12,000 12,000 13,000,15,000Source: Company estimatesEXHIBIT 2: CONTRACTOR HOURLY RATEContractoeYear 1 – labourer 75Year 2 labourer 80Year3- labourer 85Year4- labourer 90Year5- labourer 95Calculate initial cost of investment for both projects

Why Choose Us

  • 100% non-plagiarized Papers
  • 24/7 /365 Service Available
  • Affordable Prices
  • Any Paper, Urgency, and Subject
  • Will complete your papers in 6 hours
  • On-time Delivery
  • Money-back and Privacy guarantees
  • Unlimited Amendments upon request
  • Satisfaction guarantee

How it Works

  • Click on the “Place Order” tab at the top menu or “Order Now” icon at the bottom and a new page will appear with an order form to be filled.
  • Fill in your paper’s requirements in the "PAPER DETAILS" section.
  • Fill in your paper’s academic level, deadline, and the required number of pages from the drop-down menus.
  • Click “CREATE ACCOUNT & SIGN IN” to enter your registration details and get an account with us for record-keeping and then, click on “PROCEED TO CHECKOUT” at the bottom of the page.
  • From there, the payment sections will show, follow the guided payment process and your order will be available for our writing team to work on it.