Diwali Airlines Has a Contract That Gives It the Opportunity

question 67

Multiple Choice

Diwali Airlines has a contract that gives it the opportunity to purchase up to 10,000,000 gallons of jet fuel at $2.00 per gallon. The current market price of jet fuel is $2.26 per gallon. Diwali believes it will only need 6,000,000 gallons of jet fuel. What is the value of this opportunity?

• A) $1,040,000
• B) $9,040,000
• C) $2,600,000
• D) $1,560,000

---

Definitions:

Net Present Value

A method used to evaluate the profitability of an investment by calculating the difference between the present value of cash inflows and outflows over a period of time.

Rate of Return

The increase or decrease in value of an investment for a set duration, shown as a percentage of the original investment amount.

Present Value Factors

The numerical factors used in calculating the present value of future cash flows, based on a specific discount rate and time period.

Sunk Costs

Costs that have been incurred in the past, cannot be recouped, and are not relevant to future decisions.