Question

Q5 A. (20 Marks) Project Options. A silver mine can yield 10,000 ounces of copper at a variable cost of $8 per ounce. The fixed costs of operating the mine are $10,000 per year. In half the years, silver can be sold for $12 per ounce; in the other years, silver can be sold for only $6 per ounce. Ignore taxes. What is the average cash flow you will receive from the mine if it is always kept in operation and the silver always is sold in the year it is mined? b. Now suppose you can shut down the mine in years of low silver prices. What happens to the average cash flow from the mine? a. i II

Answer 1

sales: 10,000 ounces

Total sales=(5000×12)+(5000×6)

   $90,000

Less variable cost

(8×10000) $80,000

Fixed cost   $10000

Net income. 0

Cash inflow and outflow are equal so no loss and no gain.

2 If shut down bear the fixed cost $10,000 cash outflow and bear the loss of fixed cost.