Revenue from gas wells that have been in production for at least 5 years tends to follow a decreasing geometric gradient. One particular rights holder received royalties of $4000 per year for years 1 through 6; however, beginning in year 7, income decreased by 15% per year each year through year 14. Calculate the future value in year 14 of the royalty income from the wells provided all of it was invested at 10% per year.
What will be an ideal response?
Find P in year 5, then find future worth of all cash flows
P 5 = 4000[1 – (0.85/1.10) 9 ]/(0.10 + 0.15)
= $14,428
F = [4000(F/A,10%,5) + P 5 ](F/P,10%,9)
= [4000(6.1051) +14,428](2.3579)
= [24,420 + 14,428](2.3579)
= $91,601
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