9780321818171_berk_ch03

Due to a pre existing contract you have the

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Unformatted text preview: s E X A MPLE 3 .3 Applying the 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? Solution ◗ Plan We need to quantify the costs and benefits using market prices. We are comparing \$25,000 with 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 of the...
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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.

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