Jackpot Mining Company operates a copper mine in central Montana. The company pa

Question

Jackpot Mining Company operates a copper mine in central Montana. The company paid $1,250,000 in 2016 for the mining site and spent an additional $650,000 to prepare the mine for extraction of the copper. After the copper is extracted in approximately 4 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 $ 350,000 25 % 2 450,000 40 % 3 650,000 35 % To aid extraction, Jackpot purchased some new equipment on July 1, 2016, for $170,000. After the copper is removed from this mine, the equipment will be sold. The credit-adjusted, risk-free rate of interest is 10%. Required: 1. Determine the cost of the copper mine. (Do not round intermediate calculation.) Cost of copper mine

Explanation / Answer

Cost of copper mine is calculated as shown below:

Cost of copper mine Amount ($) Mining Site 12,50,000 Development Cost 6,50,000 Restoration cost    350000*25% 87500    450000*40% 180000    650000*35% 227500 495000 PV factor 10% 0.683 3,38,085 Equipment Cost 1,70,000 Cost of copper mine 24,08,085

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