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

Answer:

(B) 299,574

Explanation:

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

That's because it is being paid in advance.

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

$25000 \times \frac{1 - {1.075}^{ - 25} }{.075} \times 1.075 = present \: value$

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.