A mining company has the opportunity to extract from a coal reserve this year for a profit of $40 per pound. The current market rate of interest is 5 percent. The present value of this future extraction is

Question

Quizplus · Accepted Answer

The present value of a future amount is calculated by dividing the future amount by (1 + interest rate). Here, the future profit is $40, and the interest rate is 5%, so the present value is $40 / (1 + 0.05) = $40.

A Mining Company Has the Opportunity to Extract from a Coal