Question

Jackpot Mining Company operates a copper mine in central Montana. The company paid $1,150,000 in 2018 for the mining site and spent an additional $630,000 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	$	330,000		25%
2		430,000		40%
3		630,000		35%

To aid extraction, Jackpot purchased some new equipment on July 1, 2018, for $230,000. After the copper is removed from this mine, the equipment will be sold for an estimated residual amount of $24,000. 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 10.3 million pounds of copper from the mine. Actual production was 1.9 million pounds in 2018 and 3.3 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.

Restoration costs: Cash outflow Probability Probable Restoration Cost Possibility 1 $330,000 25% Possibility 2 430,000 40% Possibility 3 630,000 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 (#.##) $0.00 Pounds extracted Depreciation expense

Answer 1

Restoration costs	Cash outflow	Probability	Probable Restoration Cost
Possibility 1	330000	25%	82500
Possibility 2	430000	40%	172000
Possibility 3	630000	35%	220500
				$475000
Table or Calculator function:
		n = 4 i = 10%
Restoration costs (475000*0.68301)				$324430

PV factor of $1 n = 4, i=10% is 0.68301

Mining site	1150000
Development costs	630000
Restoration costs	324430
	$2104430

Depletion expense (mine)	2018	2019
Depletion per pound	2104430/10300000	=$0.2043 per pound
Pounds extracted	1900000	3300000
Depletion expense	$388170	$674190

Depreciation expense (mining equipment)	2018	2019
Depreciation per pound	(230000-24000)/10300000	=$0.02 per pound
Pounds extracted	1900000	3300000
Depletion expense	$38000	$66000