An engineering company in Virginia that owns 250 acres of valuable land has deci
ID: 1138266 • Letter: A
Question
An engineering company in Virginia that owns 250 acres of valuable land has decided to lease the mineral rights to a mining company. The primary objective is to obtain long term income to finance ongoing projects 6 and 13 years from the present time. The engineering company makes a proposal to the mining company that it pay $65,000 per year for 29 years beginning 1 year from now, plus $157,000 6 years from now and $375,000 13 years from now. If the mining company wants to pay off its lease immediately, how much should it pay now if the investment should make 12% per year?
Explanation / Answer
Year
payment
payment 2
payment 3
total payment
disc factor 10%
Present value
1
50000
50000
0.90909
45,454.50
2
50000
50000
0.82644
41,322.00
3
50000
50000
0.75131
37,565.50
4
50000
50000
0.68301
34,150.50
5
50000
200000
250000
0.62092
155,230.00
6
50000
50000
0.56447
28,223.50
7
50000
50000
0.51315
25,657.50
8
50000
50000
0.4665
23,325.00
9
50000
50000
0.42409
21,204.50
10
50000
50000
0.38554
19,277.00
11
50000
50000
0.35049
17,524.50
12
50000
50000
0.31863
15,931.50
13
50000
50000
0.28966
14,483.00
14
50000
50000
0.26333
13,166.50
15
50000
300000
350000
0.23939
83,786.50
16
50000
50000
0.21762
10,881.00
17
50000
50000
0.19784
9,892.00
18
50000
50000
0.17985
8,992.50
19
50000
50000
0.1635
8,175.00
20
50000
50000
0.14864
7,432.00
Amount to be paid now
621,674.50
Year
payment
payment 2
payment 3
total payment
disc factor 10%
Present value
1
50000
50000
0.90909
45,454.50
2
50000
50000
0.82644
41,322.00
3
50000
50000
0.75131
37,565.50
4
50000
50000
0.68301
34,150.50
5
50000
200000
250000
0.62092
155,230.00
6
50000
50000
0.56447
28,223.50
7
50000
50000
0.51315
25,657.50
8
50000
50000
0.4665
23,325.00
9
50000
50000
0.42409
21,204.50
10
50000
50000
0.38554
19,277.00
11
50000
50000
0.35049
17,524.50
12
50000
50000
0.31863
15,931.50
13
50000
50000
0.28966
14,483.00
14
50000
50000
0.26333
13,166.50
15
50000
300000
350000
0.23939
83,786.50
16
50000
50000
0.21762
10,881.00
17
50000
50000
0.19784
9,892.00
18
50000
50000
0.17985
8,992.50
19
50000
50000
0.1635
8,175.00
20
50000
50000
0.14864
7,432.00
Amount to be paid now
621,674.50