Economics question..PLEASE HELP!!?

Question

Please please please help me and show me how you did it. Thank you very much:


"If I have a deposit of crude oil worth $10 billion dollars and I decide to extract it and sell it, and then invest the money in a physical capital with the rate of interest being 5%. What should my consumption be of the capital to make it sustainable?"

Answer 1

There are a few assumptions that you have to make:
1.) The $$ that you receive AFTER the extraction is $10b, and you don't have to worry about deducting your final value based upon the costs of extraction.
2.) This is an inflation-free scenario -- you don't care about making a little more every year to make up for the affect of inflation.

Ok...so the answer: If you are making 5% interest (assume annual return only) you can only spend the interest that you make, and NEVER EVER touch the principle (which is the initial $10b. To find your annual interest, multiply 10,000,000,000 by .05, which is another way of saying 5%. When you multiply them together, you get $500M. Therefore, you can only spend $500M a year and not touch the principle so that it is sustainable.

Make sense?

Let me know if there are any other variables to consider, such as inflation, etc.