Question

1(a): You are the operations manager at your firm. Due to a pre-existing contract, you have the opportunity (but not the obligation) to acquire 30,000 barrels of gasoline and 50,000 barrels of heating oil for a total cost of $7,500,000. The current market price of gasoline is $2.0785 per gallon and for heating oil is $93.08 per barrel. One barrel = 42 gallons. You are not sure that your firm needs all of the gasoline or heating oil. As a result, you are wondering if you should take this opportunity.

What is the value of this opportunity in dollars? (do not include any symbols, such as $, in your response).

Answer 1

Since our firm doesn't need the gasoline and the heating oil, we see if we can use this opportunity to sell these quantities in the market and make a profit out of it. The total worth we will be getting (according to market prices) is = 30000 x 2.0785x 42 + 50000 x 93.08 = 7,272,910. This amount is less than what we will be required to pay to get these quantities. Hence, it is not wise to buy these assets for 7,500,000. Therefore, we should not take this opportunity. The value of this opportunity is = 7,272,910-7,500,000 = -227090.