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Problem - Your firm is considering a $350,000,000 capital investment in a Utah copper mining venture. The Utah property is estimated to contain 600,000 tons of copper having a percentage depletion allowance of 15%. (Note: 1 U.S. ton = 2,000 pounds). Your firm's after-tax MARR is 15% per year, and your effective income tax rate is 38%. It is anticipated that copper from this venture will be sold at the rate of 40,000 tons per year. The market price for copper is expected to be $3 per pound for the first year of production escalating, thereafter, at a nominal rate of 4% per annum. Operating expenses at the mine, exclusive of depletion deductions, will be approximately 60% of the market price. Your company will determine its depletion deduction using either the percentage depletion method or the cost depletion method, whichever is more favorable. One depletion method will be used for the life of the venture (i.e., the methodology will not change during the course of the venture).
Required - Determine the PW and IRR of the after-tax cash flow for this mining project. Is it a worthwhile undertaking?
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The external environment:
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