You own an oil pipeline that will generate a $5 million cash return over the coming year. The pipelines operating costs are negligible, and it is expected to last for a long time. Unfortunately, the volume of oil shipped is declining, and cash flows are expected to decline 3% per year. The discount rate is 7% for the first 10 years (t = 0 to t = 10), and 5% from t = 11 onwards.

a. What is the present value of the pipelines cash flows if its cash flows are assumed to last forever?

b. What is the present value of the pipelines cash flows if the pipeline is scrapped after 15 years and the value of the pipeline is $0 after 15 years?