Jackpot Mining Company operates a copper mine in central Montana. The company pa
ID: 2581737 • Letter: J
Question
Jackpot Mining Company operates a copper mine in central Montana. The company paid $1,350,000 in 2018 for the mining site and spent an additional $670,000 to prepare the mine for extraction of the copper. After the copper is extracted in approximately four years, the company is required to restore the land to its original condition, including repaving of roads and replacing a greenbelt. The company has provided the following three cash flow possibilities for the restoration costs (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.): Cash Outflow Probability 1 $ 370,000 25% 2 470,000 45% 3 670,000 30% To aid extraction, Jackpot purchased some new equipment on July 1, 2018, for $133,000. After the copper is removed from this mine, the equipment will be sold for an estimated residual amount of $26,000. There will be no residual value for the copper mine. The credit-adjusted risk-free rate of interest is 15%. The company expects to extract 10.7 million pounds of copper from the mine. Actual production was 2.3 million pounds in 2018 and 3.7 million pounds in 2019. Required: 1. Compute depletion and depreciation on the mine and mining equipment for 2018 and 2019. The units-of-production method is used to calculate depreciation. (The expected format for rounding is presented in the appropriate rows of the table. Round your final answers to nearest whole dollar.)
Explanation / Answer
Requirement 1
Cost of copper mine:
Mining site $1,350,000
Development costs 670,000
Restoration costs 288,734 †
$2,308,734
† $370,000 x 25% = $ 92,500
470,000 x 45% = 211,500
670,000 x 30% = 201,000
$505,000 x .57175* = $288,734
*Present value of $1, n = 4, i = 15% (Table 2)
Depletion:
$2,308,734
Depletion per pound = = $.2158 per pound
10,700,000 pounds
2018 depletion = $.2158 x 2,300,000 pounds = $496,340
2019 depletion = $.2158 x 3,700,000 pounds = $798,460
Depreciation:
$133,000 - 26,000
Depreciation per pound = = $.01 per pound
10,700,000 pounds
2018 depreciation = $.01 x 2,300,000 pounds = $23,000
2019 depreciation = $.01 x 3,700,000 pounds = $37,000
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