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26 November, 08:28

A firm's natural resource exploitation site will require an expenditure of $5 million to reclaim the site for environmental purposes. That expenditure is expected to be made five years from now. The present value today of that amount is $3.5 million. Because of this obligation, by what amount will (1) total depletion on the site increase and (2) how much accretion expense will be recognized, over the five years (in millions) ?

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  1. 26 November, 11:25
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    (1) $3.5 million

    (2) $1.5 million

    Explanation:

    The account of natural resources is compounded by the duty to sell the properties, which is the present value of the $5 million to be paid later, or $3.5 million.

    Total depletion over most of the life of the project thus increases by this number. Accretion expense is the growth in the obligation over time.

    The $3.5 million amount will increase to $5 million in five years, and at that time that amount's expended.
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