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Hi tutor I am unable to understand this question. Kindly explain it to me.
On 1 October 2013, Xplorer commenced drilling for oil from an undersea oilfield. The extraction of oil causes damage
to the seabed which has a restorative cost (ignore discounting) of $10,000 per million barrels of oil extracted. Xplorer
extracted 250 million barrels of oil in the year ended 30 September 2014.
Xplorer is also required to dismantle the drilling equipment at the end of its five-year licence. This has an estimated
cost of $30 million on 30 September 2018. Xplorer’s cost of capital is 8% per annum and $1 has a present value
of 68 cents in five years’ time.
What is the total provision (extraction plus dismantling) which Xplorer would report in its statement of financial
position as at 30 September 2014 in respect of its oil operations?
A $34,900,000
B $24,532,000
C $22,900,000
D $4,132,000
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