Case study: Impact of writeoff / writedown on economics

Applying the economic analysis model of ATCF to evaluate the impact of writeoff/writedown on project economics. A simplified economic analysis of ATCF with and without writeoff is recommended, but not required. A half-page write up is needed.

Please investigate the following case:

Calculate the ATCF, IRR, and NPV (at minimum ROR = 20% after tax) for 6-year project and a corporate tax rate of 30% as follows. Please consider two scenarios for mineral rights acquisition cost: (a) to write off immediately and (b) to apply cost depletion.

• The investor is a large C-Corp.
• Total reserve is 4,200,000 UNIT.
• Production will be 700,000 UNIT per year from year 1 to year 6
• Mineral rights acquisition cost for property would be $6,000,000 at time zero
• Exploration cost is expected to be $12,000,000 at time zero
• Tangible equipment cost is $6,500,000 at time zero
• Working capital of $2,000,000 at time zero
• Equipment depreciation will be based on MACRS 5-year depreciation starting from year 1 to year 6 with half-year convention (consider rates from table A-1 for 5-years with halfyear convention)
• The price of commodity is $90 per UNIT with 12% escalation each year starting from year 2
• Operating cost is $2,500,000 annually with an escalation rate of 5% starting from year 2 Environmental cost for Year 6 is $200,000 escalated 5% starting from year 0
• Royalty is 1/8