You own an oil pipeline that will generate a $2.9 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 6.0% per year. The discount rate is 5%. a. What is the PV of the pipeline’s cash flows if its cash flows are assumed to last forever? b. What is the PV of the cash flows if the pipeline is scrapped after 16 years?

You own an oil pipeline that will generate a $2.9 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 6.0% per year. The discount rate is 5%. a. What is the PV of the pipeline’s cash flows if its cash flows are assumed to last forever? b. What is the PV of the cash flows if the pipeline is scrapped after 16 years?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 2P

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