You own a gas pipeline that requires no maintenance and will produce $2 million of revenue next year.Unfortunately, after the first year the volume of gas (and thus the revenue) is expected to decline by 4.0% per year. 

a. If the discount rate is 11.0% and the pipeline lasts forever, what is it worth today?

b. If the pipeline is to be abandoned at the end of 20 years, what is it worth today?   

c. Assume now that the potential buyer of the pipeline has other investment opportunities that could give him a 16% return per year.     

Would he consider 10 million$ to be a fair price to buy the pipeline and use it for 20 years?  

Answer rating: 100% (QA)

a To calculate the present value of the pipeline that lasts forever we can use the perpetuity formul... View the full answer