Final answer:
To determine the selling price of an inherited oil well with an immediate annual payment of $39,000 for 25 years and a desired return of 7.5%, the present value of an annuity due formula needs to be used.
Step-by-step explanation:
The question deals with the valuation of future cash flows received from an oil well, a common topic in finance and business courses. To find out how much you should ask for the oil well if you decide to sell it, given that you inherited an oil well that will pay you $39,000 per year for 25 years, with the first payment being made today, and you are seeking a fair return on the well of 7.5%, you would need to calculate the present value of an annuity due since the first payment is received immediately.
The formula for the present value of an annuity due is P = C * [(1 - (1 + r)^(-t)) / r] * (1 + r), where P is the present value, C is the annual cash flow, r is the discount rate, and t is the number of periods. Plugging in the values provided, P = $39,000 * [(1 - (1 + 0.075)^(-25)) / 0.075] * (1 + 0.075). When calculated, this gives a present value of the annuity due, which would be the amount you should ask for if you decide to sell the oil well.