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In five years’ time Rainbird will have to dismantle its factory and return the site to the local authority. A provision was set up for the present value of the dismantling costs when the factory was first acquired. The opening balance on the provision at 1 January 20X1 was $2.63 million. Rainbird has a cost of capital of 8%.
What is the amount of the provision that should be carried forward at 31 December 20X1 for the dismantling of the factory?A $2,630,000
B $2,419,600
C $2,435,185
D $2,840,400Are you testing me?
What answer did you select? – let’s see if it agrees with my choice
Sir! With all due respect how can i dare to test you ? 🙂
I know the right answer ,this question is taken from BPP exam kit.
But i don,t know how the examiner arrived at that answer.
So please explain it.
ThanksIt’s $2.630,000 with one year’s discount unrolled
So $2,630,000 + 8% x $2,630,000 and that comes to $2,840,400
Easier than calculating 85 of $2.620,000 is simply to multiply $2,630,000 by 1.08 (that’s 1 plus the cost of capital expressed as a percentage … so $2,630,000 x 1.08)
OK?
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