Estimates of investment costs operating expenses and sales

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Reference no: EM134156

Question :

The Florina Mining organization has constructed a town at Jungilla, near the site of a rich mineral discovery in a remote part of Australia. The town may be abandoned when mining operations cease after an estimated 10 years. The subsequent estimates of investment costs, operating expenses and sales relate to the project to provide Jungilla with meat and agricultural manufacture over the ten year period by developing nearby land.

(a) Investment in land is $2million dollars, farm equipment $800,000 and farm buildings $400,000. The land is expected to have a realizable value of $1 million in ten years' time. The building have an evaluated useful life of 20 years, at which time their residual value would be zero, and they are to be depreciated on a straight line basis for tax purposes based on this life. The residual value of the buildings after 10 years is $100,000. The farm equipment has an evaluated life of ten years and a zero residual value. The equipment is to be depreciated on a straight line basis.

(b) Investment of $500,000 in present. This may be recovered at the end of the venture.

(d) Annual operating expenses are expected to be $4.4 million.

(e) Consider tax is paid one year after the year of income.

Is the project worth doing given that the after tax cost of capital is 10 percent pa, with a company tax rate of 30%?

Reference no: EM134156

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