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Pollution Busters Incorporated is considering a purchase of $10$ additional carbon sequesters for $$102,000$ apiece. The sequesters last for only one year before becoming saturated. Then the carbon is sold to the government.

Required:

a$.$ Suppose the government guarantees the price of carbon. At this price, the payoff after one year is $$118,320$ for sure. How would you determine the opportunity cost of capital 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 $21\%.$ She thinks this is a reasonable forecast for the future. What is the opportunity cost of capital in this case?

c$.$ If the expected return on the investment is still $16\%,$ but now depends on the price of carbon $($so that it is no longer risk$-$free$),$ then is the purchase of additional sequesters still an attractive investment for the firm?

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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 $21\%.$ She thinks this is a reasonable forecast for the future. What is the opportunity cost of capital in this case?

Opportunity cost of capital