A leased service station installs an underground storage tank on July 15, 2013. The tank has a useful life of 40 years. The current cost to remove it is 15,000. The estimated rate of inflation over the life of the asset is 2.3%. The credit-adjusted risk-free rate is 6.5%. The lease has an initial term of 20 years, starting February 1, 2013, with 4 5-year options. No economic penalty testing is done. ARO System Options settings are for Monthly compounding, Post-compounding, Start calculating ARO expense at Day of ARO setup.
Enter the lease first. Then on the ARO tab, enter the ARO information: Name “Tank”, Cost 15,000, begin date July 15, 2013, useful life 480 (months). The end date is calculated as the end date of the lease (January 31, 2033). Enter inflation rate of 2.3% and risk-free rate of 6.5%. Click Save and the results display: The Net ARO is 6,832.04.