On May 1, 2024, Hecala Mining agreed with the state of New Mexico to obtain the rights to operate a mineral mine in New Mexico for $10.5 million. Additional costs and purchases included the following.
Note: Use tables, Excel, or a financial calculator. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)
Development costs in preparing the mine $ 3,700,000
Mining equipment 139,500
Construction of various structures on site 93,500
After the minerals are removed from the mine, the equipment will be sold for an estimated residual value of $12,000. The structures will be torn down.
Geologists estimate that 850,000 tons of ore can be extracted from the mine. After the ore is removed, the land will revert back to the state of New Mexico.
The contract with the state requires Hecala to restore the land to its original condition after mining operations are completed in approximately four years. Management has provided the following possible outflows for the restoration costs:
Cash Outflow Probability
$ 650,000 40%
750,000 30%
850,000 30%
Hecala’s credit-adjusted risk-free interest rate is 7%. During 2024, Hecala extracted 125,000 tons of ore from the mine. The company’s fiscal year ends on December 31.
Required:
Determine the amount at which Hecala will record the mine.