Reference no: EM133104608

Question - A coal mine is being considered by a mining business. The following information on the cash flows linked with this project has been gathered by the company:

-$900,000 in equipment is required for the new mine.

-$210,000 in working capital is required for the new mine.

-The selling of coal is expected to bring in $750,000 every year.

-Annual cash costs linked with the new mine are expected to be $500,000.

-After 5 years, $110,000 in road repairs are required.After 15 years, the mine's coal reserves would be depleted. At the end of the 15-year period, the equipment would be sold for its salvage value of $250,000. For tax purposes, the corporation follows the straight line method of depreciation and does not account for salvage value when determining depreciation. The corporation is taxed at a rate of 30%.

Required -

-Compute net present value (NPV) of the new coal mine assuming a 15% after-tax cost of capital.

-On the basis of your computations in requirement 1, conclude whether the coal mine should be opened or not.Also, please elaborate on the following in relation to the question being asked.

1) depreciation tax shield

2) tax effect calculation