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.

Table A-1. 3-, 5-, 7-, 10-, 15-, and 20-Year Property Holf-Vaar rennuantion