Ask Question
31 March, 02:20

Two oil wells are for sale. The first will yield payments of $9,300 at the end of each of the next 15 years, while the second will yield $7,000 at the end of each of the next 28 years. Interest rates are assumed to hold steady at 3.5% per year over the next 28 years. Which has the higher present value?

+1
Answers (1)
  1. 31 March, 04:40
    0
    The first oil well has a higher present value of $83,266.24 as compared to the present value of the second oil well of $74,804.25

    Explanation:

    Step 1: Determine the total yield for both oil wells

    Total yield of the first oil wells=Yield payments per year*number of yield years

    where;

    Yield payments per year=$9,300

    Number of yield years=15

    replacing;

    Total yield of the first oil wells = (9,300*15) = $139,500

    The future value of the first oil well=$139,500

    Total yield of the second oil well=Yield payment per year*number of yield years

    where;

    Yield payments per year=$7,000

    Number of payment years=28

    replacing;

    Total yield of the second oil well = (7,000*28) = $196,000

    The future value of the second oil well=$196,000

    Step 2: Determine the present value of the two oil wells

    First oil well present value=Future value / (1+r) ^15

    r=3.5%=3.5/100=0.035

    First oil well present value=$139,500 / (1+0.035) ^15

    =139,500 / (1.035^15) = 83,266.24

    The present value of the first oil well=$83,266.24

    Second oil well present value=Future value / (1+r) ^28

    r=3.5%=3.5/100=0.035

    Second oil well present value=$196,000 / (1+0.035) ^28

    =196,000 / (1.035^28) = 74,804.25

    The present value of the second oil well=$74,804.25

    The first oil well has a higher present value of $83,266.24 as compared to the present value of the second oil well of $74,804.25
Know the Answer?
Not Sure About the Answer?
Find an answer to your question ✅ “Two oil wells are for sale. The first will yield payments of $9,300 at the end of each of the next 15 years, while the second will yield ...” in 📘 Business if you're in doubt about the correctness of the answers or there's no answer, then try to use the smart search and find answers to the similar questions.
Search for Other Answers