Copper Lake Mines Ltd. is considering whether to rebuild its current access road to its mine at Old Town. It paid $50,000 to an engineering consultant to study its options. The consultant recommended a new type of surface material that would reduce operating cost significantly. The current operating cost of the old road is estimated to be $1,800,000 per year. This new road will require less frequent resurfacing which will result in the reduction of maintenance time by 20% per year and also lower road surfacing supplies usage by 10% per year. 

Current operating costs are:

 

Maintenance salaries$800,000

 

Road surfacing supplies$1,000,000

 

$1,800,000

 

The new surface requires an initial investment of $700,000 to construct the new road. The new road will also require an immediate increase of $200,000 in additional road surfacing supplies.

 

10 years from today the mine is expected to be shut down and there will be restoration costs to remove the road and restore the land, which is estimated to cost $400,000. The $200,000 in additional road surfacing supplies will be drawn down in the final year of operations.

 

Assume that the CCA rate on the road is 8%; the tax rate = 25% and the discount rate = 12%, Assume the company operates other mines and will continue to have other assets in the CCA class.

 

Assuming it is now in a year after Nov. 20, 2018,should Copper Lake undertake this project?

 

 

 

Answer rating: 100% (QA)

To determine whether Copper Lake Mines Ltd should undertake the project we need to calculate the net present value NPV of the projects cash flows Lets ... View the full answer