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Assignment Questions

Is Investing in Wind Power a Good Idea?

During the latest jump in the price of crude oil, you research and come to believe that wind power has to be part of the long-term solution to weaning ourselves away from petroleum usage. Because of this, you are thinking of investing in a wind farm project in your state. You believe this to be a wise investment and Boone Pickens invested $6 billion into wind power which just confirms your hunch. However, after taking an on-line quantitative analysis class you decide to utilize what you have learned and take a more objective approach.

You are offered the chance to invest at three different levels. You could make a small investment of just $5,000, a more substantial investment of $50,000, or a fairly large investment of $150,000. All of the investments are for 5 year terms. In reviewing the start-up and overhead costs, you realize that if the price of crude oil again goes over $110/barrel for a substantial period of time then wind power becomes viable from a pricing standpoint and your investment would be worth three times your original venture (ie. $50,000 becomes $150,000). If the price of crude oil rises but not quite to those levels (between $80/barrel and $110/barrel), then your investment becomes worth 40% more than the original investment (an annualized return of 6.96%, $50,000 becomes $70,000). However, if the price of crude oil remains lower (below $80/barrel) then the profits get consumed by overhead and start-up costs and you end up only receiving back 90% of your original investment (ie. You receive $45,000 from a $50,000 initial investment, thereby losing $5,000). You read an article from a prominent oil market analyst who believes the price of crude oil going back over $110/barrel for a substantial period of time in the next 5 years is about 15%. Based upon recent OPEC statements he believes the price of crude oil increasing to between $80/barrel and $110/barrel is about 50% with the likelihood that the price will stay low at 35%.

***How you would invest, if at all. In a short one-two page answer, describe what method you used and why and how that led to your final investment decision.

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