On April 1, 2014, the company incurred capital cost of $100 million in respect of the mine and it is expected that the mine will be abandoned in eight years’ time. The mine is situated in a country where there is no environmental legislation obliging companies to rectify environmental damage and is it very unlikely that any such legislation will be enacted within eight years. It has been estimated that the cost of cleaning the site and re-planting the trees will be $25 million if the replanting were successful at the first attempt, but it will probably be necessary to make a further attempt, which will increase the cost by a further $5 million. The company’s cost of capital is 10%. Explain why a provision should be made for the cost of cleaning the site.
On April 1, 2014, the company incurred capital cost of $100 million in respect of the
mine and it is expected that the mine will be abandoned in eight years’ time.
The mine is situated in a country where there is no environmental legislation
obliging companies to rectify environmental damage and is it very unlikely that any
such legislation will be enacted within eight years.
It has been estimated that the cost of cleaning the site and re-planting the trees
will be $25 million if the replanting were successful at the first attempt, but it will
probably be necessary to make a further attempt, which will increase the cost by a
further $5 million. The company’s cost of capital is 10%.
Explain why a provision should be made for the cost of cleaning the site.
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