Question
On March 1, 2021, Shipley Resources entered into an agreement with the state of Alaska to obtain the rights to operate a mineral mine for
On March 1, 2021, Shipley Resources entered into an agreement with the state of Alaska to obtain the rights to operate a mineral mine for $8 million. As part of the agreement, Shipley agrees to restore the land to its original condition after mining operations are completed in approximately ten years. Management has provided the following possible outflows for the restoration costs that will occur ten years from now:
cash Outflow | Probability |
$200,000 | 30% |
$400,000 | 30% |
$500,000 | 40% |
Shipley's credit-adjusted risk-free interest rate is 9%. The asset retirement obligation (rounded) that should be recognized by Shipley at the beginning of the extraction activities is:
a) $160,516
b) $168,961
c) $211,205
d) $380,000
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