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?

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).