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Rocky Mountain Oil and Gas Corp is considering building a pipeline from a remote source of natural gas with only a 6 year supply
Rocky Mountain Oil and Gas Corp is considering building a pipeline from a remote source of natural gas with only a 6 year supply of reserves. The pipeline will cost $1,000,000, plus installation costs of $100,000; accompanying buildings will cost another $190,000. Both the pipeline and the buildings qualify for a CCA (depreciation) rate of 20%. Important: The half-year rule applies. (only half of the full-year depreciation is taken in the first year). Rocky Mountain Oil and Gas expects that revenue from the pipeline in the first year will be $675,000 which will grow at rate of 6% per year for the 6-year life of the project. Variable costs each year are estimated to be 45% of revenue and fixed costs are estimated to be $120,000 per year. In 6 years, the buildings and pipeline will be able to be sold for $380,436.48 (after environmental cleanup costs). Rocky Mountain Oil and Gas has a tax rate of 32%, and its cost of capital is 12.5%. They have hired you as a consultant to determine whether or not Rocky
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