electron-pilot paper

“Electron has estimated at 30.6.2006, it will cost $15m ( NPV) to restore the site to its original condition using a discount rate of 5%. 95% of this costs relates to the removal of the power station. 55 relates to the damage caused through generating energy.

In this question, Is the $15m at present value? why would we need to unwind the discount rate?”

Because a year has passed since that estimated NPV

DATES ARE IMPORTANT!

The question says that, at 30 June 2006 the $15m is NPV. Now ask yourself what the abbreviation NPV means!

I assume that your “55” should be “5%” (I keep making that typing mistake too!)

2) without the question in front of me, I seem to remember that you needed to go back one year to arrive at the original provision, unwind it for one year to get to the start point for this year (I could be wrong)

We unwind the provision at the applicable rate creating the double entry Dr Income statement, credit provision. Unwinding involves unwinding the brought forward at the revised (if applicable) cost of capital and re-estimating the cost to decommission in 19 years’ time

Re dividends, is this a condition or situation that existed as at the year end? No! so it’s a non-adjuster

OK?

No, I didn’t have neither the question nor the answer in front of me – the previous post was from memory

However, now I have

The NPV of the provision for the environmental damage is $0.7m and is only required for the periods when Electron is producing energy and will build up over the 20 years at the rate of unwinding (5%) + being increased $0.7 / 20 years each year

And the provision ($0.1m) IS charged through income statement:

“Depreciation 5.7
Provision for damage 0.1
Unwinding of discount (finance cost) 0.7” is a quote from the printed answer

OK?

You’re welcome.

Karen, much as though I appreciate your politeness, there really is no need to respond to my posts with your thanks. Each time I see a thread where my name is not the last one, I have to open it because it may be a new question.

When I see that it’s you (or anyone else) simply saying “thank you”, I then again have to respond so my name is last on the thread.

May I therefore ask that, so long as you are happy with my response, you merely transmit your thanks telepathically. I shall receive them and return the message through telepathy “You’re welcome” 🙂

If you are not happy with my response, then by all means post your supplementary questions but otherwise I shall assume that you are happy when you don’t respond

Is that ok? (Don’t respond to that question unless it’s not ok!)

It’s a rounded amount and is explained within the printed solution ….. but not well explained!

Given that you are happy with the amount of .7 (more correctly valued as .714) calculated as the provision for damage caused by the production of energy, and presumably you are happy with the time period of 20 years, what the examiner appears to have done is spread the provision for damage on a straight line basis over 20 years

There is a note at the end of the answer that identifies the alternative method of calculating the present value of the required provision and then applying discount factors / cost of capital rates to unroll that discounted provision over the period of 20 years

What I personally find strange is the calculation of .7 / 20 = 0.1

My own mental arithmetic keeps telling me that the figure should be 0.035

Hmmmm!

Hi,

Yes, you need to unwind the discount each year for the full 20 years. This will require you to apply the 5% to the outstanding provision balance, so as a double entry it would be:

DR Finance costs
CR Provision

In the second year we apply the 5% to the outstanding provision at the end of year one.

Thanks