Reference no: EM132519821

Vulcan Metals Ltd is a metal engineering and steel fabrication company that operates a factory in Sydney. Metal production and fabrication involves the use of hazardous materials including methylene chloride, chromium VI (hexavalent chromium), and various metal working fluids.

During the year ending 30 June 2020, management of Vulcan Metals Ltd decided that it would close its Sydney factory in five years' time and relocate its operations to rural NSW. The reason for this decision was that companies that relocated to rural areas were eligible for generous government grants as well as tax concessions.

Because of its use of hazardous materials, Vulcan Metals Ltd is legally obligated to dismantle its Sydney factory and undertake an extensive clean-up of the land. Vulcan Metals Ltd engaged an environmental consulting firm who, as at 30 June 2020, provided the following estimates of the future costs of dismantling the factory and cleaning up the land:

Cost                  Probability

$1,000,000           20%

800,000              70%

600,000                 10%

• On 30 June 2020, the risk-free discount rate, based on five-year government bonds, is 6%. However, Vulcan Metals Ltd believes that a discount rate of 5% is appropriate to adjust for the risks specific to this liability.

Required

Question 1: Determine the amount that, in your judgement, Vulcan Metals Ltd should recognise as a provision as at 30 June 2020. Justify the approach that you used to calculate the amount