I suspect we are in agreement, working the problem from opposite ends -- if I understand correctly, you assume the Royalty Trust Unit price efficiently reflects future oil price, while I assume Trust Unit pricing to be inefficient relative to probable future oil prices and CPI inflation.
However, I wonder how good my model is and post here my calculations for the assumptions early posited. Your critique greatly appreciated:
A. If WTI holds at $20 and no change in the CPI, payments will be $2.98 through '04, ceasing therafter. Present worth of Trust Units @ 6 1/4% is $2.77.
B. Similarly if WTI is $25, royalties continue through '09 and PW is $9.82.
C. And if WTI is $30, royalties continue through'10 and PW is $18.11
My own approach is to assume (best guess) that WTI will average $25 in '00, increasing 2.5% annually thereafter, and that the CPI will increase 2.0% annually. With these assumptions, royalties will continue through '17, and discounted rate of return (cash on cash) is 18% on present Unit price of $10.50.
Interestingly, when Trust Units were below $5 and WTI pushing $10, rate of return was zero to negative.