Calculate the present value of the restoration provision

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Zebra Ltd erected an oil rig in Camel River. The cost of the rig and associated technology amounted to $ 8,000,000 during the reporting period ending 30 June 2019.

The oil rig commenced production on 1 July 2019. At the end of the rig's useful life, which is expected to be 3 years, Nichol Ltd agreed to dismantle the oil rig, remove it, and return the site to its original condition due to moral obligation. After consulting its own engineers and environmentalists, Zebra Ltd estimates that if such work was required to be done at the present time it would cost $1,200,000.

The cost of this are expected to increase by an average of three percent per year over the next three years.

The rate on 3-year government bonds reflects the relevant time value of money, and the rate is 3 percent.

Required

Question 1: Calculate the present value of the restoration provision to be recorded as at the 30 June 2019?

Reference no: EM132609552

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