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. 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 %The asset retirement obligation that should be recognized by MMC at the beginning of the extraction activities is: ______

Answer 1

Answer:

The beginning of the extraction activities is 14.7 million.

Explanation:

Please find the detailed answer as follows:

Present Value of Cash Flows Expected From the Project/Asset Retirement Obligation at the Beginning = (.60*10 + .40*30)*PVIF(7%,3 Years) = (.60*10 + .40*30)*.81630 = 14.7 million .