Assess whether midstream energy partners should proceed

Assignment Help Financial Management

Reference no: EM132060006

You are working for Midstream Energy Partners considering a potential pipeline investment. The capital cost of the pipeline is $100 million.

If you build the pipeline, you will receive a total of between $200 million to $400 million in royalties (this is the present discounted value of royalties over the life of the pipeline; you can ignore taxes and depreciation in this problem).

You may assume that these royalties are distributed uniformly between $200 million to $400 million. Unfortunately, there is a risk of a rupture, and if the pipeline ruptures, your company will be liable for $800 million in damages.

The probability of a rupture is low, however, at a level of Prupture = 0.03. If there is a rupture, there is a 25% probability that political pressure from the state in which the rupture occurs and unwelcome attention from the US Congress and federal regulators will cause the total losses to the company to quadruple to $3.2 billion.

Note that the damages are not net of royalties. For example, if royalties are $300 million and if the pipeline ruptures causing $800 million in damages, the net payoff to the company would be: $300 million - $100 million (capital cost) - $800 million = -$600 million.

Your task is to assess whether Midstream Energy Partners should proceed with this pipeline investment. Midstream has stringent risk controls in place under which the company will not proceed with any investment that would lose $50 million or more in the worst 5% of outcomes

Reference no: EM132060006

Questions Cloud

Examine ethical issues and dilemmas in business : Determine the role of stakeholder interests, the interrelationship of ethics and social responsibility, and the role of corporate governance in ethics.

Calculate the line loss ratio and combined ratio : A property-casualty insurer brings in $6.17million in premiums on its homeowners MP line of insurance. The line's losses amount to $4,238,790.

Determine the net present value of the project : Project X has an expected cash outflow at time zero of 1,031 and has the following projected cash inflows over the next six years.

What is the book value of the given asset : A project requires $360,566 of equipment that is classified as 7-year property. What is the book value of this asset at the end of year 5 given the following.

Assess whether midstream energy partners should proceed : You are working for Midstream Energy Partners considering a potential pipeline investment. The capital cost of the pipeline is $100 million.

How much must you deposit in equal annual deposits : You would like to have $50,000 in 15 years. To accumulate this amount, you plan to deposit each year an equal sum in the bank, which will earn 7%.

Calculate npv and irr for each problem : The World Transport Co. is considering two proposals for new software designed to improve the efficiency of their routing system.

What would the lump sum be worth in twenty years : Using the last 5 year (or longest average available in history of investment if created less than five years ago) what would the lump sum be worth in 20 years?

Compute the net present value : Worldwide Scientific Equipment is considering a cash acquisition of Medical Labs for $1.3 million.

User Account

All Pages