Question

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 discount rate of 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 total amount capitalized by MMC regarding this property, at the beginning of the extraction is.

Answer 1

Answer:

$14.7million

Explanation:

Amount paid by MMC: $200M

Cost incurred by MMC :$60M

Risk free interest rate : 7%

Let's first find the expected cash out flow.

We have:

($10,000,000*0.6)+($30,000,000*0.4)

= $18,000,000

At a credit-adjusted discount rate of 7% and expected cashflow after 3 years is $18million. At the beginning of the extraction, the total amount capitalized by MMC will be:

18,000,000*(7%, 3years)

18,000,000*0.81630

= $14,693,400

=> $14.7 million