Suppose you own the option to extract 1,000 barrels of oil from public land over the next two years. You are deciding whether to extract the oil immediately, allowing you to sell the oil for $ 20 per barrel, or to wait until next year to extract the oil and sell it then for an uncertain price. The extraction costs are $ 17 per barrel. The forward price is $ 20, and you know that oil year will be either $ 15 per barrel or $ 25 per barrel, depending on demand conditions. Are you better off extracting the oil today or waiting one year? Explain how your answer might be different if prices next year are either more or less certain but have the same mean.
Answer to relevant QuestionsSingular Construction is calculating whether to build a new distribution facility. The proposal investment will cost Singular $ 4 million to construct and provide cash savings of $ 500,000 per year over the next ten years. ...Construct a spreadsheet model for each of the following exercises and then use the model to build a simulation model. a.Jason Enterprises faces uncertain future sales. Specifically, for the coming year, the firm’s CFO ...Huntsman Chemical is a relatively small chemical company located in Port Arthur, Texas. The firm’s management is contemplating its first international investment, which involves the construction of a petrochemical plant in ...Highland Properties owns two adjacent four-unit apartment buildings that are both on 20,000 square feet of land near downtown Portland, Oregon. One of the properties is in very good condition, and the apartments can be ...Vespar’s senior management team was poised to undertake the clean-coal power plants when they received a call from the chief engineer for the contractor who had been selected to build the initial plant. The engineer had ...
Post your question