Suppose that a land owner receives annual royalty payment of $2000 at the end of

Question

Suppose that a land owner receives annual royalty payment of $2000 at the end of first year, $2200 at the end of second year, $1900 at the end of third year, $2500 at the end of forth year, and $1500 at the end of fifth year. Calculate the future value of these payment at the end of fifth year at an annual interest rate of 8%. If 1/12 of each of the royalty payments were received monthly, calculate the present value of these payment at a nominal annual interest (discount) rate of 8%. Please show your work.

Explanation / Answer

Part (A)

Future value of the royalty payments at the end of the 5th Year

Future Value = C * ( 1 + r )^4 + C * ( 1 + r )^3 + C * ( 1 + r )^2 + C * ( 1 + r )^1 + C

Here,

C = Royalty payments at the end of each year

r = Rate of Interest

Future Value = 2000 * ( 1 + 8%) ^ 4 + 2200 * ( 1 + 8%) ^ 3 + 1900 * ( 1 + 8%) ^ 2 + 2500 * ( 1 + 8%) ^ 1 + 1500

Future Value = $ 11,908.50

Part (B)

Present Value of royalty payments received monthly

Present Value = C

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