All Coal Mines Ltd, (ACM) a mining company is constructing a town at Emerald a remote

area in Queensland where it is building a coal mine. The town will be abandoned when the

coal has been fully extracted from the mine which is estimated to be in ten years time.

Management of ACM have been given the following estimates that relate to the provision of

general services, food and provisions for the company town at Emerald over the ten year

period of the mine.

i) Purchase of land $500,000, cost of portable buildings $100,000 and purchase equipment

$200,000. The land is expected to be able to be sold in ten years time at a value of

$250,000. The buildings can be sold for $25,000 in ten years, but the equipment will

have no value in ten years time.

ii) Management of ACM depreciates all assets over a ten year life span the same as the

project. The taxation office has provided advice to ACM that the buildings are

depreciated for tax purposes over 20 years straight line and equipment at ten years

straight line. Land cannot be depreciated for tax purposes, and in this case there are no

tax effects from gains or losses on land.

iii) The project will require an investment in inventory of $125,000 at the start of the project.

iv) The annual cash sales are estimated to be $1,450,000 and cash operating costs are

estimated to be $1,050,000

Will the project prove profitable for All Coal Mines Limited given that the required rate of

return is 15% pa. and the company tax rate is 30%?