Question

Jackpot Mining Company operates a copper mine in central Montana. The company paid $2,000,000 in 2018 for the mining site and spent an additional $800,000 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	$	500,000		25%
2		600,000		40%
3		800,000		35%

To aid extraction, Jackpot purchased some new equipment on July 1, 2018, for $160,000. After the copper is removed from this mine, the equipment will be sold for an estimated residual amount of $40,000. 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 12.0 million pounds of copper from the mine. Actual production was 3.6 million pounds in 2018 and 5.0 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.)

Answer 1

SI. No:	Cash Outflow	Probability	Total
1	500,000	25%	125000
2	600,000	40%	240000
3	800,000	35%	280000
Total			645000
PV of $1, n = 4, I = 15%			0.5718
Restoration Costs			368781
Depletion (2000000+800000+368781)			3168781
				Depletion / lbs (3168781/12000000)			0.264
Depreciation	(160000-40000)/12000000
	0.01 per lbs
	2018	2019
Pounds	$   3,600,000	$   5,000,000
Depreciation	$             0.01	$             0.01
Depreciation	$        36,000	$        50,000
Depletion	$          0.264	$          0.264
Depletion	$      950,400	$   1,320,000