You own an oil pipeline that will generate a $2million cash return over the coming year. Thepipeline’s operating costs are negligible, and it isexpected to last for a very long time. Unfortunately,the volume of oil shipped is declining, and cashflows are expected to decline by 4% per year. Thediscount rate is 10%.a) Calculate the PV of the pipeline’s cash flows if itscash flows are assumed to last forever.b) Calculate the PV of the cash flows if the pipelineis scrapped after 20 years.
You own an oil pipeline that will generate a $2million cash return over the coming year. Thepipeline’s operating costs are negligible, and it isexpected to last for a very long time. Unfortunately,the volume of oil shipped is declining, and cashflows are expected to decline by 4% per year. Thediscount rate is 10%.a) Calculate the PV of the pipeline’s cash flows if itscash flows are assumed to last forever.b) Calculate the PV of the cash flows if the pipelineis scrapped after 20 years.
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
Related questions
Question
You own an oil pipeline that will generate a $2
million cash return 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
discount rate is 10%.
a) Calculate the PV of the pipeline’s cash flows if its
cash flows are assumed to last forever.
b) Calculate the PV of the cash flows if the pipeline
is scrapped after 20 years.
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