A silver mine can yield 11,000 ounces of silver at a variable cost of 32 per oun

Question

A silver mine can yield 11,000 ounces of silver at a variable cost of 32 per ounce. The fixed costs of operating the mine are 44,000 per year. In half the years silver can be sold for $48, per ounce in the other years silver can be sold for only 24 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 old in the year it is mined?

Average cash flow _____

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

Average cash flow. ___________

Explanation / Answer

total costs = 44000 + 11000 * 32 = 396000

Amount obtained in half the years is 48 * 11000 = 528000

Amount obtained in other half = 24 * 1100 = 264000

Average amount obtained = 528000 * 0.5 + 264000 * 0.5 = 396000

Hence Average cash flow = 396000 - 396000 = 0.

Average cash flow if the mine is shut down is 528000 - 396000 = 132,000

But given that silver is mined in only half the years the cash flow = 132000 * 0.5 = 66,000

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