Question

In: Economics

A natural gas well is projected to produce $233,000 in profit during its first year of...

A natural gas well is projected to produce $233,000 in profit during its first year of operation, $228,000 the second year, $223,000 the third year, and so on, continuing this pattern. If the well is expected to produce for a total of 10 years, and the effective annual interest rate is 7.0%, which of the following most closely represents the present worth of the well?

$1,498,000

$1,669,000

$2,186,000

$1,924,000

Solutions

Expert Solution

Answer:
Year Profit PV factor@ 7% PV
1    233,000.00 0.934579439        217,757.01
2    228,000.00 0.873438728        199,144.03
3    223,000.00 0.816297877        182,034.43
4    218,000.00 0.762895212        166,311.16
5    213,000.00 0.712986179        151,866.06
6    208,000.00 0.666342224        138,599.18
7    203,000.00 0.622749742        126,418.20
8    198,000.00 0.582009105        115,237.80
9    193,000.00 0.543933743        104,979.21
10    188,000.00 0.508349292          95,569.67
PW equals    1,497,916.74
Hence, the correct answer is (a) 1,498,000.
Please rate my answer well. Thanks in advance.

Rahul Sunny answered 1 year ago
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