Question

Jackpot Mining Company operates a copper mine in central Montana. The company paid $1,650,000 in 2021 for the mining site and spent an additional $730,000 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	$	430,000		15%
2		530,000		45%
3		730,000		40%

To aid extraction, Jackpot purchased some new equipment on July 1, 2021, for $260,000. After the copper is removed from this mine, the equipment will be sold for an estimated residual amount of $34,000. 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 11.3 million pounds of copper from the mine. Actual production was 2.9 million pounds in 2021 and 4.3 million pounds in 2022.

Required:
1. Compute depletion and depreciation on the mine and mining equipment for 2021 and 2022. 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 15% Possibility 1 Possibility 2 Possibility 3 430,000 530,000 730,000 45% Probable Restoration Cost $ 64,500 238,500 292,000 $ 595,000 PV of $1 40% Table or Calculator function: n = 4 10% Present value of probable restoration costs Cost of copper mine: Mining site Development cost Restoration cost $ 1,650,000 730,000 378,123 2021 2022 Depletion expense (mine): Depletion per pound (#.##**) $ 0.0000 Pounds extracted 2021 2022 Depletion expense Depreciation expense (mining equipment) Depreciation per pound (#.##) Pounds extracted Depreciation expense $ 0.00 0 0

Answer 1

Computation of Depletion and Depreciation On mine & equipment for 2021 & 2022 Restoration costs Cash outflow Probability Probable Restoration Cost Possibility 1 430000 15% 64500 Possibility 2 530000 45% 238500 Possibility 3 730000 40% 292000 $ 5,95,000 $ 4,06,391 Restoration costs (595000*0.68301) PV factor of $1 n = 4, i=10% is 0.68301 Mining site Development costs Restoration costs $ $ $ 16,50,000 7,30,000 4,06,391 27,86,391 Depletion expense (mine) Depletion per pound Pounds extracted Depletion expense 2021 =2786391/11300000 $ 2900000 $ 7,15,140 $ 2022 0.2466 Per Pound 4300000 10,60,380 Depreciation expense (mining equipment) Depreciation per pound Pounds extracted Depletion expense 2021 (260000-34000)/11300000 $ 2900000 $ 58,000 $ 2022 0.0200 Per Pound 4300000 86,000 * Kindly Comment down for any clarifications/ queries and please upvote.

Answer 2

Computation of Depletion and Depreciation On mine & equipment for 2021 & 2022 Restoration costs Cash outflow Probability Probable Restoration Cost Possibility 1 430000 15% 64500 Possibility 2 530000 45% 238500 Possibility 3 730000 40% 292000 $ 5,95,000 $ 4,06,391 Restoration costs (595000*0.68301) PV factor of $1 n = 4, i=10% is 0.68301 Mining site Development costs Restoration costs $ $ $ 16,50,000 7,30,000 4,06,391 27,86,391 Depletion expense (mine) Depletion per pound Pounds extracted Depletion expense 2021 =2786391/11300000 $ 2900000 $ 7,15,140 $ 2022 0.2466 Per Pound 4300000 10,60,380 Depreciation expense (mining equipment) Depreciation per pound Pounds extracted Depletion expense 2021 (260000-34000)/11300000 $ 2900000 $ 58,000 $ 2022 0.0200 Per Pound 4300000 86,000 * Kindly Comment down for any clarifications/ queries and please upvote.