Mineral rights to a gold/silver mineral property can be acquired by a company fo
ID: 2551621 • Letter: M
Question
Mineral rights to a gold/silver mineral property can be acquired by a company for a $500,000 bonus cost at time zero. A mineral development cost of $2,000,000 and mine equipment cost of $1,000,000 will be incurred at time zero. Year one production will be 200,000 tons of ore from initial reserves estimated to be 1,000,000 tons of ore, with net smelter return value of the ore estimated to be $18 dollars per ton. Royalties are 16% of gross income. Operating costs in year 1 are estimated to be $200,000. Assume 7-year life MACRS depreciation starts in year 1 using the half-year convention. Expense 70% of the mine development cost at time zero. Deduct the remaining 30% by amortization with a six month (6/60) deduction at time zero. Assume a 40% effective income tax rate and determine the estimated cash flow during time zero and year one for a comporation, assuming "stand alone" loss carry forward economic analysis.
Explanation / Answer
Statement showing Cash flow at Year-0 Particular Amount Calculation Bonus Cost $500,000 Mine Equipment Cost $1,000,000 Mine Development Cost $1,400,000 $2000000*70% Cash Outflow at 0 year $2,900,000 Statement showing Cash flow at Year-1 Particular Amount Calculation Revenue $21,600,000 ( 1200000 x 18 ) Less: Operating Expense $200,000 (1000000/ 7 x 1/2 ) Depreciation $714,259 (16 % x 21600000 ) Amortisation of Mine Development Cost $10,000 Royalties $3,456,000 EBIT $17,219,742 Less: Tax @40% $6,887,897 Net Earning $10,331,845 Depreciation $714,259 Cash Flow Inflow after Tax $11,046,103