Question

A firm's natural resource exploitation site will require an expenditure of $5 million to reclaim the site for environmental purposes. That expenditure is expected to be made five years from now. The present value today of that amount is $3.5 million. Because of this obligation, by what amount will (1) total depletion on the site increase and (2) how much accretion expense will be recognized, over the five years (in millions)?

Answer 1

Answer:

(1) $3.5 million

(2) $1.5 million

Explanation:

The account of natural resources is compounded by the duty to sell the properties, which is the present value of the $5 million to be paid later, or $3.5 million.

Total depletion over most of the life of the project thus increases by this number. Accretion expense is the growth in the obligation over time.

The $3.5 million amount will increase to $5 million in five years, and at that time that amount's expended.