You own a pipeline that will generate a net cash inflow of $2 million over the coming year. The pipeline's operating costs are negligible, and it is expected to last for a very long time. Unfortunately, the volume of oil shipped is declining, and cash flows are expected to decline by 4% per year. The relevant discount rate is 10%. What is the PV of the pipeline's cash flows if the pipeline is operated forever? And what is the PV of the cash flows if the pipeline will be shut down after 20 years (with no additional cash flows)? D
You own a pipeline that will generate a net cash inflow of $2 million over the coming year. The pipeline's operating costs are negligible, and it is expected to last for a very long time. Unfortunately, the volume of oil shipped is declining, and cash flows are expected to decline by 4% per year. The relevant discount rate is 10%. What is the PV of the pipeline's cash flows if the pipeline is operated forever? And what is the PV of the cash flows if the pipeline will be shut down after 20 years (with no additional cash flows)? D
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:You own a pipeline that will generate a net cash inflow of $2 million over
the coming year. The pipeline's operating costs are negligible, and it is
expected to last for a very long time. Unfortunately, the volume of oil
shipped is declining, and cash flows are expected to decline by 4% per year.
The relevant discount rate is 10%. What is the PV of the pipeline's cash
flows if the pipeline is operated forever? And what is the PV of the cash
flows if the pipeline will be shut down after 20 years (with no additional
cash flows)?
D
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