You are presented with the opportunity to buy an oil well. Its output is worth $50,000...
You are presented with the opportunity to buy an oil well. Its output is worth $50,000 per year, lasts 10 years, and goes down by $2,000 each year (so $50K, $48K, $46K…in years 1, 2, 3). Your annual discount rate is 8%; what’s the most you should pay?
Homework Answers
Present worth of output = 50000 * (P/A,8%,10) - 2000 * (P/G,8%,10)
= 50000 * 6.710081 - 2000 * 25.976831
= 283550.41
Most we should pay today = Present worth of output = 283550 (Nearest Dollar)
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