Asset Retirement Obligation - Example

On January 1, 20X0 a mining company purchases a tract of land for $5,000,000 that it intends to mine. State regulations require the company to return the land to its original condition upon completion of the mining operation. The company estimates that it will operate the mine for 5 years and at the end of the mining operation, it will incur costs of $1,000,000 to return the land to its original condition. The mining company typically borrows money at 6%.