Problem #12

The surface rights to a rural property have been estimated by analysis of market sales at $400 per acre for dry cropland, $550 per acre for meadow, and $135 per acre for grazing land.

The property has producing mineral rights with an oil well returning $1,750 per month to the landowners 1/8 interest. The well has an estimated life of 10 years with production terminating in the 11th year (this assumes 10 years level production, then a complete decline or stop).

The operation contains 320 acres cropland, 920 acres grazing, and 70 acres meadow.

A. What is the present value of the mineral production with a 10% return? A 15% return?

B. What is the value of both the surface and 1/8th mineral interest at 10%?