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
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 8%. It estimates the possible cash flows for restoring the land, three years after its extraction activities begin, as follows: (PV of $1, PVA of $1) (Use appropriate factor(s) from the tables provided.)
Cash Outflow | Probability | ||||||
$ | 28 | million | 70 | % | |||
$ | 84 | million | 30 | % | |||
The asset retirement obligation (rounded) that should be recognized by MMC at the beginning of the extraction activities is:
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