An oil company is considering drilling in the Gulf at a current cost of $350,000 with an expected profit of $400,000 in three years. The current market rateof interest is 5 percent. Should the company make the investment?

Question

Quizplus · Accepted Answer

The present value of the profit ($400,000) discounted at 5% over three years is less than the current cost of $350,000, making the investment unwise.

An Oil Company Is Considering Drilling in the Gulf at a Current