Question

ackpot Mining Company operates a copper mine in central Montana. The company paid $1,550,000 in 2018 for the mining site and spent an additional $710,000 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	$	410,000		25%
2		510,000		40%
3		710,000		35%

To aid extraction, Jackpot purchased some new equipment on July 1, 2018, for $249,000. After the copper is removed from this mine, the equipment will be sold for an estimated residual amount of $27,000. There will be no residual value for the copper mine. The credit-adjusted risk-free rate of interest is 10%.

The company expects to extract 11.1 million pounds of copper from the mine. Actual production was 2.7 million pounds in 2018 and 4.1 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.)

Restoration costs: Cash outflow Probability Probable Restoration Cost Possibility 1 $410,000 25% Possibility 2 510,000 40% Possibility 3 710,000 35% $0 Table or Calculator function: n = 4 i = Present value of probable restoration costs Cost of copper mine: Mining site Development cost Restoration cost Depletion expense (mine): 2018 2019 Depletion per pound (#.####) $0.0000 Pounds extracted Depletion expense Depreciation expense (mining equipment) 2018 2019 Depreciation per pound (#.##) Pounds extracted 0 Depreciation expense $

Answer 1

Computation of depletion and depreciation on the mine and mine equipment for 2018 and 2019
Restoration Costs	Cash Outflow	Probability	Probable Restoration Costs
Possibility 1	410000	25%	102500
Possibility 2	510000	40%	204000
Possibility 3	710000	35%	248500
Probable Restoration Cost			555000
Table or Calculator function (n=4,1=10%)		[1/(1+.1)^4]	0.6830135
Present Value of probable Restoration Cost			379072
Cost of Copper Mine
Mining Site		1550000
Development Cost		710000
Restoration Cost		379072
Cost of Copper Mine		2639072
Depletion Expense-Mine	2018	2019
Depletion per pound	2639072/11000000	2639072/11000000
A	0.24	0.24
Pounds Extracted-B	2700000	4100000
Depreciation Exp-A*B	648000	984000
Depreciation Exp(Equipment)	2018	2019
Depreciation per pound-A	(249000-27000)/11000000	(249000-27000)/11000000
	0.02	0.02
Pounds Extracted-B	2700000	4100000
Depreciation Expense-A*B	54000	82000