Chanter 8: Income Tax, Working Capital, and Discounted Cash Flow Analysis 473 8-3 Development of a coal property which a corporation may purchase for a mineral rights acquisition cost of $10 million is being considered. Mineral development capital of $10 million will be needed in evaluation time 0 for overburden stripping with the cost considered to be incurred in the first month of time 0. Mine equipment costs of $15 million also will be incurred in time 0 along with $2 million cost for working capital. The mine life is estimated to be 5 years. Mine equipment will be depre- ciated over 7 years using modified ACRS rates, starting in time 0 with the half-year convention. Salvage value and working capital return will be $5 million at the end of year 5 with any taxable gain taxed as ordi- nary income. The effective tax rate is 40%. Coal reserves are estimated to be 5 million tons and production for years 1 through 5 is projected to be 1 million tons per year. Coal selling price is estimated to be $30 per ton in year 1, escalating 10% per year in years 2 through 5. Royalties are 8% of revenue. Mining operating costs are estimated to be $12 per ton in year 1, also escalating by 10% per year in following years. Calculate the project DCFROR and NPV for a minimum DCFROR of 20% to determine if the mine development economics are satisfactory for: A) No other income exists against which to use tax deductions, so carry negative taxable income forward and use against project income and tax. This makes the project "stand alone." B) Other taxable income does exist so realize tax benefits from nega- tive taxable income in the year incurred