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27 November, 10:46

You inherited an oil well that will pay you $26,000 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?

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  1. 27 November, 14:19
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    Answer: $311,557.14

    Explanation:

    GIVEN the following;

    Payment per period (PMT) = $26,000

    Period (n) = 25 years

    Rate of return (r) = 7.5% = 0.075

    Asking price, if one decides to sell:

    Using the formula for present value of annuity due;

    Present Value (PV):

    PMT * [ (1 - (1 + r) ^-n) : r] * (1 + r)

    $26,000 * [ (1 - (1 + 0.075) ^-25) : 0.075] * (1 + 0.075)

    $26,000 * [ (1 - (1.075^-25)) : 0.075] * 1.075

    $26,000 * [11.146945860662] * 1.075

    =$311557.13680550

    =

    Present Value if one decides to sell will be : $311,557.14 (2 decimal places).
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