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%

Required:
a. The asset retirement obligation (rounded) that should be recognized at the beginning of the extraction activities is:
b. The asset retirement obligation (rounded) that should be reported on the balanace sheet one year after activities begin is:

a. $14.7 million

b. $15.7 million

Explanation:

a.  The asset retirement obligation (rounded) that should be recognized at the beginning of the extraction activities is:

Present Value of Cash Flows Expected From the Project / Asset Retirement Obligation at the Beginning = (0.60*10 + .40*30) * PVIF(7%,3 Years)

=(0.60*10,000,000 + 0.40 * 30,000,000) * 0.81630

= (6,000,000 + 12,000,000) *  0.81630

= 18,000,000 * 0.81630

= $14.7 million

b. The asset retirement obligation (rounded) that should be reported on the balance sheet one year after activities begin is:

Asset Retirement Obligation One Year After = Present Value of Cash Flows Expected From the Project*(1+.07)

= 14,700,000 * (1+0.07)

= 14,700,000 * (1.07)

= $15.7 million

odd consecutive integers are odd integers that follow each other. they have a difference of 2 between every two numbers. if n is an odd integer, then n, n+2, n+4 and n+6 will be odd consecutive integers. the first number in the pattern is always the variable on its own or in this case, "n". examples.