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Suppose you own an oil lease on a tract of land. Actual extraction of oil may be done fairly quickly. If you extract immediately, you
Suppose you own an oil lease on a tract of land. Actual extraction of oil may be done fairly quickly. If you extract immediately, you will earn $150 million. However, oil prices are expected to rise 12% per year for three years, 10% per year for the following 4 years, 8% per year for the following 2 years and 6% per year thereafter for the foreseeable future. The opportunity cost of capital for this project is 8.5%. When should you extract the oil.
Never Extract it.
Extract in year 7.
Extract in year 3.
Extract in year 9.
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