A mining project involves production from a 5,000,000-ton reserve. The time zero mineral rights acquisition cost of $2,300,000 is the basis for cost depletion. Development expenses of $4,500,000 will be incurred at time zero. Producing equipment costing $3,500,000 at time zero, will go into service in year one and be depreciated using the 7-year life MACRS depreciation with the half-year convention. Production is estimated to be 390,000 tons per year, starting in year one. Product selling price is estimated to be $80 per ton in year one, $82 in year two, and $84 in year three. Royalties are 11.5% of gross revenues in each year. Operating costs are expected to be $30 per ton of production in year one, $32 in year two, and $34 in year three. The allowable percentage depletion rate is 15.0%. The effective federal and state income tax rate is 40.0%. No other income exists against which to use deductions, so all negative taxable income will be a carried forward until used against project income (stand alone analysis). Determine the cash flows for years 0, 1, 2, and 3 without taking write-offs on remaining tax book values at year 3, assuming the investor is a corporation. Expense 70% of mineral development in time zero. Capitalize the other 30% and deduct by amortization over 60 months assuming a six-month deduction (6/60) in time zero.

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