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a salt mine you inherited will pay you $35,000 per year for 25 years, with the first payment being made today. if you think a fair return on the mine is 7.5%, how much should you ask for it if you decide
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40 votes
40 votes
a salt mine you inherited will pay you $35,000 per year for 25 years, with the first payment being made today. if you think a fair return on the mine is 7.5%, how much should you ask for it if you decide to sell it? select the correct answer. a. $419,225.54 b. $419,403.84 c. $418,690.64 d. $418,868.94 e. $419,047.24

User Neiman Aleksei
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1 Answer

10 votes
10 votes
Selling price should be atleast equal to the present value of income stream that the salt mine would generate.

Price to be asked for selling the mine= 25000 + 25000/(1.075) + 25000/(1.075)^2 +..........25000/(1.075)^24
=25000 + 25000*PVIFA(0.075,24)
=25000 + 25000*10.9830
= $2,99,575

Note-

PVIFA (Present Value Interest Factor Annuity) is a factor which can be used to calculate the present value of a series of annuities where first annuity is received at the end of the year. Thus, payment received at the end of first year (2nd term in the series) till payment received at the beginning of 25th year or end of 24th year form an annuity for 24 years whose collective value can be calculated as PVIFA(0.075,24).

User Vikas Gulati
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