Question: Smithson Mining operates a silver mine in Nevada. Acquisition, exploration, and development costs totaled $ 6 . 1 million. After the silver is extracted in

Smithson Mining operates a silver mine in Nevada. Acquisition, exploration, and development costs totaled $

6.1

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)

550, 000, 10 %

probability;

(2)

600, 000, 50 %

probability; and

(3)

700, 000, 40 %

probability. The company

s credit

-

adjusted, risk

-

free rate of interest is

5 % .

What is the initial cost of the silver mine?

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