Suppose you find oil in your backyard and the oil company has offered to give you the following payments at the end of each of the next six years. Year 1 = $ 5,000; Year 2 = $10,000; Year 3 = $15,000, Year 4 = $20,000; Year 5 = $25,000; Year 6 = $30,000
a. What is the present value of your discovery if you could receive a 5% return in an alternative investment?
b. If you were to decide to take each of the royalty checks identified above and deposit them in a savings account that earned 3% annually but paid out interest each quarter, what balance would you have in your account at the end of the six years?
c. In the face of the information provided above, what is the least that you would be willing to accept if you were to sell your oil rights today? Justify your answer.