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PROBLEM 13C 6 Net Present Value Analysis Including Income Taxes LO8 The Crescent Drilling Company owns the drilling rights to several tracts of land on which natural gas has been found The amount

PROBLEM: 13C–6 Net Present Value Analysis Including Income Taxes [LO8]

The Crescent Drilling Company owns the drilling rights to several tracts of land on which natural gas has been found. The amount of gas on some of the tracts is somewhat marginal, and the com- pany is unsure whether it would be profitable to extract and sell the gas that these tracts contain. One such tract is tract 410, on which the following information has been gathered:

 

 

The natural gas in tract 410 would be exhausted after 10 years of extraction work. The equip- ment would have a useful life of 15 years, but it could be sold for only 15% of its original cost when extraction was completed. For tax purposes, the company would depreciate the equipment over 10 years using straight-line depreciation and assuming zero salvage value. The tax rate is 30%, and the company’s after-tax discount rate is 10%. The working capital would be released for use elsewhere at the completion of the project.

Required:

1.       Compute the net present value of tract 410. Round all dollar amounts to the nearest whole dollar.

2.       Would you recommend that the investment project be undertaken?

Jun 27 2020 View more View Less

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