Abacus Energy drilled a natural gas well in northern Alberta and began producing from the well immediately. The company’s geological engineers estimate that the well will be productive for 10 years. Environmental regulations require the company to restore the well site to its original state at the end of the well’s useful life. Management estimates that it will cost $2 million to restore the site.

Required:
a. Compute the present value of the future site restoration costs at the beginning of the 10-year production life of the well. The appropriate discount rate is 8%.
b. Compute the annual depreciation expense related to the site restoration costs using the straight-line method.
c. Compute the amount of interest expense to be accrued on the obligation for site restoration for the first two years of the well’s production life.