An electricity company has the opportunity to use natural gas to generate electricity at a cost of $30 per unit in 2 years. The current market rate is 4 percent. The present value of this cost is about

Question

Quizplus · Accepted Answer

The present value of a future cost can be calculated using the formula:PV = FV / (1 + r)^nwhere:PV is the present valueFV is the future valuer is the interest raten is the number of yearsIn this case, the future cost is $30, the interest rate is 4%, and the number of years is 2. Plugging these values into the formula, we get:PV = 30 / (1 + 0.04)^2PV = 30 / 1.0816PV = $27.73Therefore, the present value of the cost of using natural gas to generate electricity is $27.73, which is closest to choice A, $28.

An Electricity Company Has the Opportunity to Use Natural Gas