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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Kissy

Business

26 April, 18:46

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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Cody Bird · Answer 1

(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.