Problem 10-24 Project Options (LO4) A silver mine can yield 14,000 ounces of sil

Question

Problem 10-24 Project Options (LO4)

A silver mine can yield 14,000 ounces of silver at a variable cost of $30 per ounce. The fixed costs of operating the mine are $63,000 per year. In half the years, silver can be sold for $46 per ounce; in the other years, silver can be sold for only $23 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 14,000 ounces of silver at a variable cost of $30 per ounce. The fixed costs of operating the mine are $63,000 per year. In half the years, silver can be sold for $46 per ounce; in the other years, silver can be sold for only $23 per ounce. Ignore taxes.

Explanation / Answer

1. Average selling price of silver = (23+46)/2 = 34.5 per ounce

Profit per ounce = 34.5-30 = 4.5 per ounce

So average cashflow = 4.5 per ounce * 14000 ounces - 63,000 (fixed cost) = 0

2. Selling price of silver = 46 per ounce

Profit per ounce = 46-30 = 16 per ounce

So average cashflow = 16 per ounce * 14000 ounces - 63,000 (fixed cost) = 224,000-63,000 = 161,000

Hope this helped ! Let me know in case of any queries.

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