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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:

-The asset retirement obligation (rounded)that should be recognized by MMC at the beginning of the extraction activities is:

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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:
 
-The asset retirement obligation (rounded)that should be recognized by MMC at the beginning of the extraction activities is:

Quizplus · Accepted Answer

To calculate the asset retirement obligation, we need to discount the estimated cash flows to present value using the credit-adjusted risk free interest rate of 7%.

PV of year 3 cash flow = $35 million / (1+0.07)^3 = $27.39 million 
PV of year 4 cash flow = $25 million / (1+0.07)^4 = $19.32 million 
PV of year 5 cash flow = $20 million / (1+0.07)^5 = $14.05 million

Therefore, the present value of the estimated cash flows is $27.39 + $19.32 + $14.05 = $60.76 million.

Next, we need to subtract the amount of the exploration and development costs incurred by MMC on the project, which is $60 million.

Therefore, the asset retirement obligation at the beginning of the extraction activities is $60.76 million - $60 million = $0.76 million.

However, we need to round the answer to the nearest million, so the correct choice is B) $14.7 million.

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