A silver mine can yield 16,000 ounces of silver at a variable cost of $36 per ounce. The fixed costs of operating the mine are $48,000 per year. In half the years, silver can be sold for $52 per ounce; in the other years, silver can be sold for only $26 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? (Leave no cells blank. Enter "0" wherever required. Do not round intermediate calculations.) b. Now suppose you can costlessly shut down the mine in years of low silver prices. What happens to the average cash flow from the mine? (Do not round intermediate calculations.)
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
A silver mine can yield 16,000 ounces of silver at a variable cost of $36 per ounce. The fixed costs of operating the mine are $48,000 per year. In half the years, silver can be sold for $52 per ounce; in the other years, silver can be sold for only $26 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? (Leave no cells blank. Enter "0" wherever required. Do not round intermediate calculations.)
b. Now suppose you can costlessly shut down the mine in years of low silver prices. What happens to the average cash flow from the mine? (Do not round intermediate calculations.)
Trending now
This is a popular solution!
Step by step
Solved in 4 steps
