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1. Pollution Reducer, inc is considering a purchase of 10 additional carbon sequesters for $116,000 apiece. The sequesters last for only 1 year before becoming
1. Pollution Reducer, inc is considering a purchase of 10 additional carbon sequesters for $116,000 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 $136,880 for sure. What is the opportunity cost of capital for this investment? b. Suppose instead that the sequestered carbon has to be sold on the Spain Carbon Exchange. Carbon prices have been extremely volatile, but Pollution Reducers' CFO learns that average rates of return from investments on that exchange have been about 23%. She thinks this is a reasonable forecast for the future. What is the opportunity cost of capital in this case? c. Is the purchase of additional sequesters a worthwhile capital investment? Yes
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