Santa Cruz Oil Is Obligated to the State of Nevada

question 117

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 completed in four years. The cash flow possibilities are probabilities for the restoration costs in four years are as follows:
$\begin{array}{rc}\text { Cash Outflow }&\text { Probability }\\\text { \$20 million } & 20 \% \\30 \text { million } & 40 \% \\40 \text { million } & 30 \% \\50 \text { million } & 10 \%\end{array}$

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Definitions:

Cost of Capital

Cost of capital refers to the minimum rate of return that a company must earn on its investments to maintain its market value and satisfy its stakeholders.

Future Cash Flows

Estimates of the amount of money to be received or paid out in the future by an entity.

Negative NPVs

Instances where the Net Present Value (NPV) of a project or investment is below zero, indicating that the expected cash flows are not sufficient to cover the initial investment.

Shareholder Wealth

The overall value of an investment in a company held by its shareholders, often measured by stock price appreciation and dividends.