Question: Smithson Mining operates a silver mine in Nevada Acquisition e

Smithson Mining operates a silver mine in Nevada. Acquisition, exploration, and development costs totaled $5.6 million. After the silver is extracted in approximately five years, Smithson is obligated to restore the land to its original condition, including constructing a wildlife preserve. The company's controller has provided the following three cash flow possibilities for the restoration costs:
(1) $500,000, 20% probability;
(2) $550,000, 45% probability; and
(3) $650,000, 35% probability.

The company's credit-adjusted, risk-free rate of interest is 6%. What is the initial cost of the silver mine?

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  • CreatedJuly 02, 2013
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