You have the opportunity to purchase mineral rights to a property in North Dakot

Question

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? Answer $55,637.57 $49,676.40 $80,000.00 $122,996.93 Which of the following actions will DECREASE the present value of an investment? Answer Decrease the interest rate. Decrease the future value. Decrease the amount of time. All of the above will decrease the present value.

Explanation / Answer

cash flows worth today= 10000PVIFA(12%,8)

= 10000x4.9676= $49676.398 or $49676.40

cash flows worth today= 10000PVIFA(12%,8)

= 10000x4.9676= $49676.398 or $49676.40

If the payment occur at the beginning of each period

cash flows worth today= 10000+10000PVIFA(12%,7)

= 10000+(10000x4.5638)

=$$55,637.57

A simple way to rembember is If the payment occur at the beginning of each period, then one payment will be done today, so we don't have to get that to PV(because it is already in PV (i.e) today) and the remaning period will decease by 1

so in above n= 7 years(and not 8)

and we will add 10000

Is this all clear??? If not let me know , I will try to explain it better.

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