Suppose you are deciding how much oil to pump from your oil well in the next ten years. If you know oil would sell for $5 per gallon in ten years and the real interest rate is about 4%, the present value of the opportunity cost of selling the oil today would be about

Question

Quizplus · Accepted Answer

The present value of the opportunity cost of selling the oil today can be calculated using the formula:
PV = FV / (1 + r)^n
where PV is the present value, FV is the future value, r is the real interest rate, and n is the number of years.

In this case, the future value is the selling price of oil in ten years, which is $5 per gallon. The real interest rate is given to be 4%. Therefore, the present value can be calculated as:
PV = $5 / (1 + 0.04)^10
PV = $2.50

So, the present value of the opportunity cost of selling the oil today is $2.50 per gallon. However, the question is asking for the value in ten years' time, so we need to discount this value by 10 years:
PV = $2.50 / (1 + 0.04)^10
PV = $3.38

Therefore, the best choice is A) $3.38, which represents the present value of the opportunity cost of selling the oil today in ten years' time.

Suppose You Are Deciding How Much Oil to Pump from Your