Real-Life Math
As an environmental accountant, one of your jobs is to help companies put accurate environmental information into their financial plans.
"There is an upside to all this. There's an opportunity to save money through reduced waste costs, energy efficiency and financial paybacks," says environmental accountant Anne Davis.
You've been hired to work with a copper mining company. It is trying to figure out its future environmental costs.
The company expects there's enough copper left in the ground to keep the mine open another 10 years. After that, the owners will have to shut it down. According to experts, it will cost $40 million to clean up the mine afterwards. By law, the mine will have to cover that cost.
The mine will also have to pay $10 million to build a purification plant to handle wastewater from its tailings pond. A tailings pond is where chemicals (for example, sulfuric acid), ore and water are dumped after the ore has been processed. If left untreated, water from the tailings pond will eventually leech into surrounding soil and contaminate the groundwater.
The company has to represent these future costs on its annual financial report. It's asked you to determine how much money it will have to set aside over the next 10 years in order to meet these future environmental costs.
How much money per year should the company be putting away in order to meet these future demands? Assume 10 percent interest.
Here's the formula:
Future Value = Payment x [((1 + i)t- 1) / i]
i = interest rate
t = time