10. {Oil depletion allowance ) A wealthy investor spends $1 million to dill and develop an oil we aths estiniated reserves o 200.000 barrels Tewe is to be operated over 5 years, producing de estimated q estimated that he oil will be sold lor $20 per ba Ie net income is also shown uantities slhown in te second colum o Table 27 It is TABLE 2.7 Oll Investment Details Barrels Gross Depletion?axable Afte-tax Year produced revenue income Option 1 Option 2 allowance income Tax income Net 1 80,000 ,600,000 1,200,000 352,000 40000 400,000 800,000 360,000 840,000 2 70,000 400,000 1,000,000 3 50,000 ,000,000 500,000 4 30,000 600,000 200,000 10.000200.000 50,000 A depletion allowance, or tax putposes, can be compUted i eithero wo ways eaci? year: 22% of gross revenue up to 50% of net income before such deduction (opuoil I), or he investme cost of he product, equa in this case to e un cos he reserves. $5 per barrel (option 2) The ailowance is deducted irom the income to determine the taxable income lhe investor is in ile 45% tax bracket (a) Complete Table 27 and show that uhe toial depleiion allowance exceeds the original investment {b) Calculate the PV and the IRR for this investment Assume an interest rate of 20%