Concord Mining Company recently purchased a quartz mine that it intends to work

Question

Concord Mining Company recently purchased a quartz mine that it intends to work for the next 10 years. According to state environmental laws, Concord 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, Concord 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 Concord’s books.

There is no active market for retirement obligations such as these, but Concord 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

Click here to view factor tables

What is the estimated fair value of Concord’s asset retirement obligation? Concord 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

$15,830 10% 24,160 30% 24,600 50% 31,640 10%

Explanation / Answer

Explanation :

Total Lumpsum to be paid = total expected cash flows * PVIF (5%,3yrs) = 24295*2.72325 = 66161

The value today of the annuity payments to commenced in ten years = 66161 * PVF (5%,10yrs) = 66161*0.61391= 40617

Estimated fair value of Concord’s asset retirement obligation $40617

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