Pollution Busters, Inc., is considering a purchase of 10 additional carbon sequesters for $ 100,000 apiece. The sequesters last for only 1 year until saturated with carbon. Then the carbon is removed and sold.
a. Suppose the government guarantees the price of carbon. At this price, the payoff after 1 year is guaranteed to be $115,000. How would you determine the opportunity 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 investment on that exchange have been about 20%. She thinks this is a reasonable forecast for the future. What is the opportunity in this case? Is the purchase of an additional sequester a worthwhile capital investment if she expects that the price of extracted carbon will be $115,000?
