Question

Building our Pipeline: Multiple target areas across the broader package On 24 October 2022, during investor presentation, the company, Gateway Mining (ASX: GML) has announced that it has multiple target areas across the broader package. Achilles East - extensive zones of granodiorite hosted gold mineralisation-is one of the six target areas. As a Finance Manager for the company, you have been asked to evaluate the project. The company paid for $300,000 Research and Development to build the capability across the projects undertaken. After looking at the project plan, you anticipate that the project will need to acquire a machinery for a cost of $500,000. The Australian Taxation Office rules allow an effective life for the machine of five years. The equipment can be depreciated on a straight-line (prime cost) basis and there is no expected salvage value after the five years

Answer 1

Considering the information provided, the Finance Manager recommends proceeding with the Achilles East project. The company has invested $300,000 in Research and Development and anticipates an additional cost of $500,000 for acquiring machinery. The Australian Taxation Office rules allow for straight-line (prime cost) depreciation over the equipment's effective life of five years with no expected salvage value.

Step-by-step explanation:

Gateway Mining's decision to move forward with the Achilles East project is based on a thorough evaluation of the financial aspects. The initial investment of $300,000 in Research and Development signifies the company's commitment to building capabilities across multiple target areas. Additionally, the anticipated machinery acquisition cost of $500,000 aligns with the strategic vision for the project.

In terms of financial management, the Australian Taxation Office rules provide a structured approach for depreciating the machinery. The straight-line (prime cost) method, spread over five years, ensures a systematic allocation of costs, reflecting the equipment's useful life. This aligns with standard accounting practices and helps in accurately accounting for the asset's depreciation over time.

The absence of an expected salvage value after the five-year period indicates that the machinery is not expected to have residual value. This consideration is crucial for determining the depreciation expense each year. The Finance Manager's recommendation to proceed with the project is grounded in these financial evaluations, taking into account both the initial investment and the long-term depreciation of the acquired machinery.