Santa Cruz Oil Is Obligated to the State of Nevada

Essay

Santa Cruz Oil is obligated to the State of Nevada to restore leased land to its original condition after its oil drilling activities are over in four years. The cash flow possibilities are probabilities for the restoration costs in four years are as follows:
The company's credit-adjusted risk-free interest rate is 6%.
Required:
Calculate the liability that Santa Cruz must record at the beginning of the project for the restoration costs.
$$\begin{array} { c c } \text { Cash Outflow } & \text { Probability } \\\hline \$ 20 \text { million } & 20 \% \\30 \text { million } & 40 \% \\40 \text { million } & 30 \% \\50 \text { million } & 10 \%\end{array}$$