Answer:
The first oil well has a higher present value of $83,266.24 as compared to the present value of the second oil well of $74,804.25
Explanation:
Step 1: Determine the total yield for both oil wells
Total yield of the first oil wells=Yield payments per year×number of yield years
where;
Yield payments per year=$9,300
Number of yield years=15
replacing;
Total yield of the first oil wells=(9,300×15)=$139,500
The future value of the first oil well=$139,500
Total yield of the second oil well=Yield payment per year×number of yield years
where;
Yield payments per year=$7,000
Number of payment years=28
replacing;
Total yield of the second oil well=(7,000×28)=$196,000
The future value of the second oil well=$196,000
Step 2: Determine the present value of the two oil wells
First oil well present value=Future value/(1+r)^15
r=3.5%=3.5/100=0.035
First oil well present value=$139,500/(1+0.035)^15
=139,500/(1.035^15)=83,266.24
The present value of the first oil well=$83,266.24
Second oil well present value=Future value/(1+r)^28
r=3.5%=3.5/100=0.035
Second oil well present value=$196,000/(1+0.035)^28
=196,000/(1.035^28)=74,804.25
The present value of the second oil well=$74,804.25
The first oil well has a higher present value of $83,266.24 as compared to the present value of the second oil well of $74,804.25
