A silver mine can yield 16,000 ounces of silver at a variable cost of $36 per ou

Question

A silver mine can yield 16,000 ounces of silver at a variable cost of $36 per ounce. The fixed costs of operating the mine are $48,000 per year. In half the years, silver can be sold for $52 per ounce; in the other years, silver can be sold for only $26 per ounce. Ignore taxes.

a. 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? (Do not round intermediate calculations.)

b. Now suppose you can costlessly shut down the mine in years of low silver prices. What happens to the average cash flow from the mine? (Do not round intermediate calculations.)

Explanation / Answer

a) Average cash flow = The calculation of average expenses annually = 36 * 16000 + 48000 = 624000 The calculation of average revenue annually = 16000 * (0.5 * $52) + 16000 * (0.5 * $26) = 624000 Thus, the average cash flow = average revenue - average expenses = 624000 - 624000 = $0 b) Average cash flow = The calculation of average expenses annually = (36 * 16000 + 48000) / 2 = 624000 / 2 = 312000 The calculation of average revenue annually = 16000 * (0.5 * $52) + $0 = 416000 Thus, the average cash flow = average revenue - average expenses = 416000 - 312000 = $104000

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