IRR of the after-tax cash flow for this mining project

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Reference no: EM131059055

Keystone Energy Company is considering a $30 million investment in a Pennsylvania coal mine. Mining engineers estimate that the mine contains 7,500,000 tons of commercial-grade, economically minable coal. (Note: 1 U.S. “short” ton = 2,000 pounds). The percentage depletion allowance for coal is 10%. The market price for this coal is expected to be $60 per short ton in the first year of mining, escalating at an annual rate of 3% thereafter. Mining would commence immediately after the company’s investment. Keystone’s after-tax MARR is 15% per year, and its effective income tax rate is 35%. Keystone expects to mine and sell 500,000 short tons of coal each year for the life of the mine. The company expects its production expenses, exclusive of depletion deductions, will be approximately $45 per short ton in the first year of mining, escalating at an annual rate of 3% thereafter. Keystone 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 project (i.e., the methodology will not change during the course of the project). Determine the PW and IRR of the after-tax cash flow for this mining project. Is it a worthwhile undertaking?

Reference no: EM131059055

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