You are considering two possible investments. Investment A is an oil well expected to produce an annual cash flow of $14,000 in one year. The cash flow is expected to increase by 2 percent per year indefinitely. Investment B is a different oil well expected to provide a cash flow of $15,600 in one year with annual increases of 4.5 percent for a total of 12 years. The appropriate discount rate is 13 percent compounded annually.
a. What are the present values of cash flows these wells are expected to generate?
b. What cash flow amount in one year on investment A would make you indifferent between these two investment options? Assume everything else remain constant.