Reference no: EM132789489

Problem 1: DDD Company, an oil production company, has a widely published environmental policy in which it undertakes to clean up all contamination that it causes. On October 1, 20x8, a contamination on a land occurs whilst transporting oil to a particular country. Based on past incidences of such contamination, a third-party contractor is willing to undertake the cleaning up on behalf of DDD Company. It estimates that the cleaning up work would take about two years to finish and it provides the following price quotation (based on current prices); Year 1, P20,000,000 and Year 2, P15,000,000. Due to general inflation and other price increases, DDD Company estimates that the contractor prices would increase by 4% by the end of year 1 and another 4.5% at the end of year 2. Payments will be made at end of each year. The current one-year and two-year risk free rates are 5% and 5.5% respectively and a 3% adjustment is required for the risks that the actual outflows be different from the estimate. What is the amount of provision for decontamination should DDD Company recognized on October 31, 20x8? (Round off PV factors to 4 decimal places, e.g. 1.2345)