You own an oil well that will pay you $30,000 per year for 10 years,with the first payment being made today.If you think a fair return on the well is 8.5%,how much should you ask for if you decide to sell it?
A)$202,893
B)$213,572
C)$224,250
D)$235,463

Question

Quizplus · Accepted Answer

We can use the Present Value formula to calculate the fair price for the well:
PV = CF / (1 + r)^n
where PV is the present value, CF is the cash flow, r is the interest rate, and n is the number of periods.

In this case, CF = $30,000 per year for 10 years, r = 8.5%, and n = 10. The first payment is already made, so we need to calculate the present value of the remaining 9 payments:
PV = $30,000 {(1 - (1 + 0.085)^-9) / 0.085} = $213,572

Therefore, the fair price to sell the well would be $213,572. The closest answer choice is B.

You Own an Oil Well That Will Pay You $30,000