A silver mine can yield 18,000 ounces of silver at a variable cost of $38 per ou
ID: 2652801 • Letter: A
Question
A silver mine can yield 18,000 ounces of silver at a variable cost of $38 per ounce. The fixed costs of operating the mine are $45,000 per year. In half the years, silver can be sold for $54 per ounce; in the other years, silver can be sold for only $27 per ounce. Ignore taxes.
What is the average cash flow you will receive from the mine if it is always kept in operation and the silver always is sold in the year it is mined?
Now suppose you can shut down the mine in years of low silver prices. Calculate the average cash flow from the mine.
A silver mine can yield 18,000 ounces of silver at a variable cost of $38 per ounce. The fixed costs of operating the mine are $45,000 per year. In half the years, silver can be sold for $54 per ounce; in the other years, silver can be sold for only $27 per ounce. Ignore taxes.
Explanation / Answer
Let us suppose (18,000/2 =) 9,000 ounces were extracted in the first half and another 9,000 ounces were extracted in the second half in a year.
a.
Average cash flow = Average sales – Total cost
= {(9,000 × $54) + (9,000 × $27)} – {(18,000 × $38) + $45,000}
= $729,000 - $729,000
= 0
Average cash flow is zero.
b.
Since the low price like $27 should not be considered, the average cash flow is as below:
Average cash flow = Average sales – Total cost
= (9,000 × $54) + {(9,000 × $38) + $45,000}
= $486,000 - $387,000
= $99,000
If the mine is shut down due to low price, the average cash flow would be $99,000.
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