Assume the costs to build the pipeline occur all in year 0


You would like to build a pipeline to transport natural gas from eastern Ohio to demand centers in the Northeast and potentially to ship it out of country as liquefied natural gas (LNG). The price you could get for shipping gas this distance is $0.50 per thousand ft3, based on estimated costs of shipping gas on competitor pipelines that ship gas the same distance. The cost of installing the 400 mile pipeline is $1.5 million per mile. This pipeline can ship 900 million ft3 per day, or 328,500 million ft3 per year. Annual costs in years 1 to 5 are $1,000,000 per year to operate and maintain the pipeline. What is the net present value of the costs and what is the net present value of the revenues assuming your interest rate is 10%? Will you be able to pay off the pipeline in 5 years? Assume the costs to build the pipeline occur all in year 0, and the costs to operate and the revenues of shipping the material occur in years 1 to 5. Ignore any years after 5.

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Business Management: Assume the costs to build the pipeline occur all in year 0
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