Question
1. A 10-year energy project requires (a) an initial capital cost of $10,000,000.00 to purchase machinery and equipment to be depreciated over 5 years using
1.
A 10-year energy project requires (a) an initial capital cost of $10,000,000.00 to purchase machinery and equipment to be depreciated over 5 years using the straight-line depreciation method with a half year convention (starting in year 0 and continuing to year 5) and (b) an initial investment of $200,000.00 to purchase mineral resources, which can be capitalized using 18% depletion. Annual revenue is
$16,000,000 and annual operating cost is $200,000 for years 1 to 10. The salvage value of the machinery and equipment will be $10,000 while an environmental remediation cost of $100,000 will be required at the end of year 10. The minimum ATCF ROR is 20% and the effective income tax rate is 30%. Calculate the ATCF, NPV, and IRR of the project and make an investment decision.
2.
Same as question 1, but to re-evaluate this investment opportunity using declining-balance depreciation method with a declining balance rate of 200% and recovery period of 5 years.
3.
Same as question 1, but to re-evaluate this investment opportunity using the 5-year property half-year convention in the Modified Accelerated Cost Recovery System (table A-1).
4.
Same as question 1, but to re-evaluate this investment opportunity with immediate writeoff.
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