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Unformatted text preview: s E X A MPLE 3 .3
Valuation Principle Problem
You are the operations manager at your firm. Due to a pre-existing contract, you have the
opportunity to acquire 200 barrels of oil and 3000 pounds of copper for a total of $25,000. The
current market price of oil is $90 per barrel and copper is $3.50 per pound. You are not sure
that you need all of the oil and copper, so you are wondering if you should take this opportunity.
How valuable is it? Would your decision change if you believed the value of oil or copper would
plummet over the next month?
We need to quantify the costs and benefits using market prices. We are comparing $25,000
200 barrels of oil at $90 per barrel
3000 pounds of copper at $3.50 per pound ◗ Execute
Using the competitive market prices we have:
(3000 pounds of copper)
(200 barrels) ($3.50/pound today) ($90/barrel today) $10,500 today $18,000 today The value of the opportunity is the value of the oil plus the value of the copper less the cost
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This note was uploaded on 02/07/2014 for the course MIS 304 taught by Professor Mejias during the Spring '07 term at University of Arizona- Tucson.
- Spring '07