6 Jackpot Mining Company operates a copper mine in central Montana. The company
ID: 2563026 • Letter: 6
Question
6
Jackpot Mining Company operates a copper mine in central Montana. The company paid $1,400,000 in 2018 for the mining site and spent an additional $680,000 to prepare the mine for extraction of the copper. After the copper is extracted in approximately four 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 $ 380,000 25%
2 480,000 40%
3 680,000 35%
To aid extraction, Jackpot purchased some new equipment on July 1, 2018, for $246,000. After the copper is removed from this mine, the equipment will be sold for an estimated residual amount of $30,000. There will be no residual value for the copper mine. The credit-adjusted risk-free rate of interest is 15%.
The company expects to extract 10.8 million pounds of copper from the mine. Actual production was 2.4 million pounds in 2018 and 3.8 million pounds in 2019.
Required:
1. Compute depletion and depreciation on the mine and mining equipment for 2018 and 2019. The units-of-production method is used to calculate depreciation. (The expected format for rounding is presented in the appropriate rows of the table. Round your final answers to nearest whole dollar.)
Restoration costs
Cash outflow
Probability
Probable Restoration Cost
Possibility 1
$380,000.00
25%
?
Possibility 2
$480,000.00
40%
?
Possibility 3
$680,000.00
35%
?
Table or calculator function
?
n=
4
i=
?
Present value of probable restoration costs
?
Cost of copper mine
Mining site
?
Development cost
?
Restoration cost
?
Depletion expense (mine):
2018
2019
Depletion per pound (#,####)
?
Pounds extracted
?
?
Depletion expense
?
?
Depreciation expense (mining equipment)
2018
2019
Depreciation per pound (#,##)
?
Pounds extracted
Depreciation expense
?
?
Restoration costs
Cash outflow
Probability
Probable Restoration Cost
Possibility 1
$380,000.00
25%
?
Possibility 2
$480,000.00
40%
?
Possibility 3
$680,000.00
35%
?
Table or calculator function
?
n=
4
i=
?
Present value of probable restoration costs
?
Cost of copper mine
Mining site
?
Development cost
?
Restoration cost
?
Depletion expense (mine):
2018
2019
Depletion per pound (#,####)
?
Pounds extracted
?
?
Depletion expense
?
?
Depreciation expense (mining equipment)
2018
2019
Depreciation per pound (#,##)
?
Pounds extracted
Depreciation expense
?
?
Explanation / Answer
Site cost 14,00,000
Developement Cost 6,80,000
Restoration Costs 3,00,195
TOTAL 23,80,195
Probable Restoration costs
TOTAL 5,25,000
Present value @ 15% for 4 years 0.5718
Net Present Value = 5,25,000 X 0.5718 = 3,00,195
Depriciation Equipment
Cost less salvage value / total extraction
(2,40,000-30,000) / 1,08,00,000 = 0.02 per pound depriciation
Year 2018 = 2.4 million extracted X 0.02 = 48,000
Year 2019 = 3.8 million extracted X 0.02= 76,000
Depletion site
Total costs/ Total extraction = per pound depletion
23,80,195 / 10,800,000 = 0.22 per pound
Year 2018= 2.4 million extractedX 0.22 = 5,28,932
Year 2019= 3.8 million extracted X 0.22 = 8,37,476
380000 25% 95,000 480000 40% 1,92,000 680000 35% 2,38,000Related Questions
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