You have the opportunity to purchase mineral rights to a property in North Dakota with expected annual cash flows of $10,000 per year for eight years.If you discount these cash flows at a rate of 12% per year,what are these cash flows worth today if the cash flows occur at the end of each period?
A)$55,637.57
B)$49,676.40
C)$80,000.00
D)$122,996.93

Question

Quizplus · Accepted Answer

Using the formula for present value of an annuity, PV = CF/(1+r)^n, where CF is the cash flow, r is the discount rate, and n is the number of periods, we get:

PV = $10,000/(1+0.12)^1 + $10,000/(1+0.12)^2 + ... + $10,000/(1+0.12)^8
PV = $49,676.40

Therefore, the cash flows are worth $49,676.40 today if discounted at a rate of 12% per year. Option B is the correct answer.

You Have the Opportunity to Purchase Mineral Rights to a Property