prices will not persist after world growth returns to normal This idea is certainly one to consider as we watch the path of oil prices over the next few years Sources: Peter Maass, “The Breaking Point,” The New York Times Magazine Online, August 21, 2005; Jad Mouawad, “The Big Thirst,” The New York Times Online, April 20, 2008; US Energy Information Administration, International Controlling a Monthly, May 2008, Table 4.1c; Neil King, Jr “Saudis Face Hurdles in New Oil Drilling,” The Wall Street Journal, April 22, 2008, A1, Neil King, Jr “Global Oil-Supply Worries Fuel Debate in Saudi Arabia,” The Wall Street Journal, June 27, 2008, A1 ANSWER TO TRY IT! PROBLEM Since you expect oil prices to rise ($54 − 45)/$45 = 20% and the interest rate is only 10%, you would be better off waiting a year before emptying the well Another way of seeing this is to compute the present value of the oil a year from now: Po = ($54 * 10,000)/(1 + 0.10)1 = $490,909.09 Since $490,909 is greater than the $45*10,000 = $450,000 you could earn by emptying the well now, the present value calculation shows the rewards of waiting a year If the choice is to empty the well now or in years, however, you would be better off emptying it now, since the present value is only $446,280.99: Po = ($54 * 10,000)/(1 + 0.10)2 = $446,280.99 Attributed to Libby Rittenberg and Timothy Tregarthen Saylor URL: http://www.saylor.org/books/ Saylor.org 725