Question

Montana Mining Co. (MMC) paid $200 million for the right to explore and extract rare metals from land owned by the state of Montana. To obtain the rights, MMC agreed to restore the land to a suitable condition for other uses after its exploration and extraction activities. In the year of acquisition, MMC incurred exploration and development costs of $60 million on the project.

MMC has a credit-adjusted risk free interest rate is 7%. It estimates the possible cash flows for restoring the land, three years after its extraction activities begin, as follows:

Cash Outflow				Probability
$	10	million			60	%
$	30	million			40	%

Additional info: PV of 1$ when n=3 & i=7 is 0.81630. FV of 1$ when n=3 & i=7 is 1.22504.

1Required: What amount of accretion expense should be recorded at the end of the second year of extraction activities?

2Required: The asset retirement obligation (rounded) that should be recognized by MMC at the beginning of the extraction activities is what?

Answer 1

answer in picture