Problem 6
You are evaluating a project to build an oil pipeline in one ofthe emerging markets. Building the pipeline will take 8 annualinvestments, each of which is paid at the beginning of the year,starting immediately. The first of these investments is $20 millionand the amount of the remaining 7 investments is expected todecrease by 3% per year. The pipeline will commence its operationsin year 9 and will transport 3,500,000 barrels of oil per year inperpetuity. As the pipeline owner, you will collect an annual cashflow equal to 10% of the total value of transported oil, with cashflows occurring at the end of each year.
If the discount rate is 12%, what is the minimum price of oilper barrel under which the Profitability Index is 1.05? Forsimplicity, assume that oil prices are constant over time and thatthe costs of running the pipeline are negligible.
