Pollution Busters Inc. is considering a purchase of 10 additional carbon sequesters for $ 100,000 apiece. The

Question:

Pollution Busters Inc. is considering a purchase of 10 additional carbon sequesters for $ 100,000 apiece. The sequesters last for only 1 year before becoming saturated. Then the carbon is sold to the government.
a. Suppose the government guarantees the price of carbon. At this price, the payoff after 1 year is $115,000 for sure. How would you determine the opportunity for this investment?
b. Suppose instead that the sequestered carbon has to be sold on the London Carbon Exchange. Carbon prices have been extremely volatile, but Pollution Busters' CFO learns that average rates of return from investments on that exchange have been about 20%. She thinks this is a reasonable forecast for the future. What is the opportunity in this case? Is the purchase of additional sequesters a worthwhile capital investment?
Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...