Question

Pollution Buster, Inc., in considering a pruchase of 10 additional carbon sequesters for $100,000 a piece. The sequesters lasts for only one year until saturated with carbon. Then the carbon is removed and sold.
a) Suppose the government guarantees the price of carbon. At this price, the payoff after 1 year is guaranteed to be $115,000. How would you determine the opportunity cost of capital for this investment?


b) Suppose instead that the sequested carbon has to soldon the London Carbon Exchange. Carbon prices have been extremely volatile, but Pollution Busters' CFO learns that average rates of return from investment on that exchange have been about 20%. She thinks that is reasonable forceast for the furture. What is the opportunity cost of capital in this case? Is the purchase of an additional sequester a worthwhile capital investment if she expects that the price of extracted carbon will be $115,000?

Answer 1

Answer and Explanation:

The answer is attached below

Answer 2

Answer:

• opportunity cost of capital  for the investment = 15%
• opportunity cost would be 20% and it is worth buying an additional sequester

Explanation:

opportunity cost of capital is the return on investment that a company loses when it decides to invest in internal projects rather than investing in save market securities like stocks and bonds that could be marketable in the long and short run.

opportunity cost of investment is calculated as

( market value - cost ) / cost

market value = $115000

cost = $100000

therefore opportunity cost of investment will be

= ( 115000 - 100000 ) / 100000

= 15000/100000 = 0.15 in percentage it will be 15%

Average rate of returns from investment can also be said to be the opportunity cost of the business hence the new opportunity cost will be

20% and also the purchase of additional sequester will be worth it becomes it will increase the rate off return ( opportunity cost ) to 20%