A silver mine can yield 14,000 ounces of silver at a variable cost of $30 per ou

Question

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.

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? (Do not round intermediate calculations.)

b. Now suppose you can shut down the mine in years of low silver prices. Calculate the average cash flow from the mine. Assume fixed costs are incurred only if the mine is operating. (Do not round intermediate calculations.)

Explanation / Answer

(a)Operating Cashflow= Quantity*(SP-VC)-FC , where SP=Selling Price,VC=Variable Cost , FC=Fixed Cost

Average Selling Price=(46+23)/2=34.5

Operating Cashflow=14000*(34.5-30)-63000=0

(b)Operating Cashflow= Quantity*(SP-VC)-FC

In this case, SP=46

Operating Cashflow=14000*(46-30)-63000=161000

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