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

Question

Quizplus · Accepted Answer

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.

An Oil Company Has the Opportunity to Extract Oil from a Reserve