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:
Cash Outflow Probability
$10 million 60%
$30 million 40%
The asset retirement obligation (rounded) that should be recognized by MMC at the beginning of the extraction activities is:
a. $ 8.2 million.
b. $14.7 million.
c. $ 18 million.
d. $ 30 million.
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