A silver mine can yield 16,000 ounces of silver at a variable cost of $34 per ou

Question

A silver mine can yield 16,000 ounces of silver at a variable cost of $34 per ounce. The fixed costs of operating the mine are $56,000 per year. In half the years, silver can be sold for $50 per ounce; in the other years, silver can be sold for only $25 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?

Average cash flow $

Now suppose you can shut down the mine in years of low silver prices. Calculate the average cash flow from the mine.

Average cash flow $

Explanation / Answer

sales= 16000*50= 800000 or 16000*25=400000
variable cost= 16000*34 = 544000
fixed cost= 56000
cash flow= 800000-544000-56000=200000 or 400000-544000-56000= -200000
average = 0
if it is closed only fixed cos will be incurred=56000

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