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Suppose that a scarce resource, Unobtanium, will be depleted in 12.00 years. At that time, a...

Suppose that a scarce resource, Unobtanium, will be depleted in 12.00 years. At that time, a more expensive substitute, Alternatium, will be available and will cost $190.00 per equivalent unit. The market interest rate is constant at 6.00%. What is the current price of Unobtanium, assuming it can be costlessly stored and does not deteriorate? Give your answer to two decimals.

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Answer #1

Ans. Suppose, price of Alternatium in future, F = $190

Market interest rate, r = 6% or 0.06

Number of years, n = 12 years

So, the present price is,

P = F/(1+r)^n = 190/(1+0.06)^12

=> P = $94.4241

Thus, the present price of Unobtanium is $94.4241 because it will be replaced by Alternatium after 12 years, so, future price of Alternatium is used to calculate Unobtanium's current price.

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