Smithson Mining operates a silver mine in Nevada. Acquisition, exploration, and development costs totaled$5.6 million. After the silver is extracted in approximately five years, Smithson is obligated to restore the land toits original condition, including constructing a wildlife preserve. The company’s controller has provided the following three cash flow possibilities for the restoration costs: (1) $500,000, 20% probability; (2) $550,000, 45%probability; and (3) $650,000, 35% probability. The company’s credit-adjusted, risk-free rate of interest is 6%.What is the initial cost of the silver mine?
Smithson Mining operates a silver mine in Nevada. Acquisition, exploration, and development costs totaled$5.6 million. After the silver is extracted in approximately five years, Smithson is obligated to restore the land toits original condition, including constructing a wildlife preserve. The company’s controller has provided the following three cash flow possibilities for the restoration costs: (1) $500,000, 20% probability; (2) $550,000, 45%probability; and (3) $650,000, 35% probability. The company’s credit-adjusted, risk-free rate of interest is 6%.What is the initial cost of the silver mine?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Smithson Mining operates a silver mine in Nevada. Acquisition, exploration, and development costs totaled
$5.6 million. After the silver is extracted in approximately five years, Smithson is obligated to restore the land to
its original condition, including constructing a wildlife preserve. The company’s controller has provided the following three
probability; and (3) $650,000, 35% probability. The company’s credit-adjusted, risk-free rate of interest is 6%.
What is the initial cost of the silver mine?
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