Asked by Queen Owusu on Jun 26, 2024
Verified
An oil company has the opportunity to extract oil from a reserve in three years with a per barrel profit of $100 per barrel. The current market rate of interest is 8 percent. The present value of this future extraction is about
A) $93
B) $108
C) $126
D) $79
Present Value
The current value of a future sum of money or stream of cash flows, given a specified rate of return.
Market Rate
The prevailing price or interest rate at which goods, services, or securities are traded in a free market.
Interest
The charge for borrowing money or the return on investment in savings accounts or bonds, typically expressed as a percentage.
- Compute and elucidate the present value and future value for making economic decisions.
Verified Answer
CC
Chelsea CarterJul 02, 2024
Final Answer :
D
Explanation :
The present value (PV) of future cash flows can be calculated using the formula PV = FV / (1 + r)^n, where FV is the future value, r is the interest rate, and n is the number of periods. Here, FV = $100, r = 8% or 0.08, and n = 3 years. So, PV = $100 / (1 + 0.08)^3 = $100 / 1.259712 = approximately $79.
Learning Objectives
- Compute and elucidate the present value and future value for making economic decisions.