Skysong Mining Company recently purchased a quartz mine that it intends to work
ID: 2543315 • Letter: S
Question
Skysong Mining Company recently purchased a quartz mine that it intends to work for the next 10 years. According to state environmental laws, Skysong must restore the mine site to its original natural prairie state after it ceases mining operations at the site. To properly account for the mine, Skysong must estimate the fair value of this asset retirement obligation. This amount will be recorded as a liability and added to the value of the mine on Skysong’s books.
There is no active market for retirement obligations such as these, but Skysong has developed the following cash flow estimates based on its prior experience in mining-site restoration. It will take 3 years to restore the mine site when mining operations cease in 10 years. Each estimated cash outflow reflects an annual payment at the end of each year of the 3-year restoration period.
Restoration
Estimated
Cash Outflow
Probability
Assessment
view factor tables
What is the estimated fair value of Skysong’s asset retirement obligation? Skysong determines that the appropriate discount rate for this estimation is 5%. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)
Restoration
Estimated
Cash Outflow
Probability
Assessment
Explanation / Answer
1) The first step is to find the expected value of the Restoration estimated cash outflow. Restoration Probability Cash outflow* Probability Estimated Assessment Cash Outflow 16150 10% 1615 23320 30% 6996 25390 50% 12695 32850 10% 3285 Expected value of the restoration estimated annual cash flow = 24591 2) The next step is to find the PV of the expected cash outflows during the years = 24591/1.05^13+24591/1.05^12+24591/1.05^11 = $ 41,112 Alternatively, using factors tables, PV = 24591*0.53032+24591*0.55684+24591*0.58468 = $ 41,112 Estimated fair value of Skysong’s asset retirement obligation = $ 41,112
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