An oil company has the opportunity to extract oil from a reserve in three years with a per barrel profit of $70 per barrel. The current market rate of interest is 4 percent. The present value of this future extraction is about

Question

Quizplus · Accepted Answer

The present value (PV) of the future extraction can be calculated using the formula PV = FV / (1 + r)^n, where FV is the future value ($70), r is the interest rate (0.04), and n is the number of years (3). Plugging in the values gives PV = $70 / (1 + 0.04)^3 ≈ $62.

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