Question

You inherited an oil well that will pay you $25,000 per year for 25 years, with the first payment being made today. If you think a fair return on the well is 7.5%, how much should you ask for it if you decide to sell it?a. $284,595b. $299,574c. $314,553d. $330,281e. $346,795

Answer 1

(B) 299,574

Step-by-step explanation:

We have to calculate the present value of an annuity-due of 25,000

That's because it is being paid in advance.

`annuity * \frac{1 - {(1 + rate)}^( - time) }{rate} * (1 + rate)= present \: value`

`25000 * \frac{1 - {1.075}^( - 25) }{.075} * 1.075 = present \: value`

299574.17

Remember: when the payment or receipts are made in advance, AKA at the beginning of the period, multiply the annuity formula for (1+rate)

That's because the annuities are held for 1 more period than usually.