Question

Jackpot Mining Company operates a copper mine in central Montana. The company paid $1,750,000 in 2018 for the mining site and spent an additional $750,000 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                450 000               15%

2                  550 000         45%

3              750 000                      40%

To aid extraction, Jackpot purchased some new equipment on July 1, 2018, for $150,000. After the copper is removed from this mine, the equipment will be sold for an estimated residual amount of $35,000. There will be no residual value for the copper mine. The credit-adjusted risk-free rate of interest is 12%.

The company expects to extract 11.5 million pounds of copper from the mine. Actual production was 3.1 million pounds in 2018 and 4.5 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	450 000	15%	67500
Possibility 2	550 000	45%	247500
Possibility 3	750 000	40%	300000
			615 000
			PV of 1$
		n=	4
		i=	12%

Present value of probable restoration costs                                       390 845

Mining site	1 750 000
Development costs	750 000
Restoration costs	390 845

  Total                                                              2 890 845

Depletion per pound	2018	2019
Depletion per Pound	?	0
Pounds extracted	?	?
Depletion expense	?	?

Depreciation expense (mining equipment)	2018	2019
Depreciation per pound	?	0
Pounds extracted	?	?
Depreciation expense	?	?

Answer 1

	2018	2019
Depletion per pound	0.25	0.25
Pounds extracted	3,100,000	4,500,000
Depletion expense	779,271	1,131,200

Mining equipment
	2018	2019
Depreciation per Pound	0.01	0.01
Pounds extracted	3,100,000	4,500,000
Depreciation Expesnes	31,000	45,000

Workings:

Cost of Mining Site	2,890,845
Expected extraction	11,500,000
Depletion per pound	0.25

Cost of Mining Equipment	150,000
Salvage Value	35,000
Depreciable Value	115,000
Expected extraction	11,500,000
Depreciation per Pound	0.01

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