A Silver Mine Can Yield 10,000 Ounces of Silver at a Variable

question 91

Essay

A silver mine can yield 10,000 ounces of silver 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. Ignoring taxes, what is the average cash flow you will receive from the mine if it is always kept in operation and the silver is always sold in the year it is mined? What happens to the average cash flow from the mine if you can shut down the mine in years of low silver prices?

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Definitions:

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