Question

at it intends to work for the next 10 years g to state environmental laws, Culver 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, Culver 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 Culver's books. There is no active market for retirement obligations such as these, but Culver 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 $15,780 23,430 22,610 31,150 Probability Assessment 10% 30% 50% 10% What is the estimated fair value of Culver's asset retirement obligation? Culver determines that the appropriate discount rate for this estimation is 5%. (Round factor values to 5 decimal places, eg. 1.25124 and final answer to 0 decimal places, e.g. 458,581.) Estimated fair value of Culver's asset retirement obligation 62707 Click if you would like to Show Work for this question: Open Show Work

Answer 1

Answer

• Correct Answer = $ 62,708

Estimated Cash Outflow	Probability	Probable Cash Outflow
[A]	[B]	[C = A x B]
$                                      15,780	10%	$                 1,578
$                                      23,430	30%	$                 7,029
$                                      22,610	50%	$               11,305
$                                      31,150	10%	$                 3,115
Annual Cash outflow		$               23,027
PV annuity factor as per factor table [5% for 3rd period]		2.72325
Annual Cash outflow = Fair Value of Culver asset retirement obligation (23027 x 2.72325]		$               62,708 = Answer

--Working [since factor table was not provided]

Year	PV Factor at 5%
1	0.95238
2	0.90703
3	0.86384
Annuity factor (total) as per Factor table	2.72325