Corrosion problems and manufacturing defects rendered a gasoline pipeline between El Paso, TX, and Phoenix, AZ, subject to longitudinal weld seam failures. The pressure was reduced to 80% of the design value. If the reduced pressure resulted in delivery of less product valued at $100,000 per month, what will be the value of the lost revenue after a 2-year period at an interest rate of 15% per year, compounded continuously?
What will be an ideal response?
r = 15% per year = 1.25% per month; need effective i per month
i = e^0.0125 – 1 = 0.0126 (1.26% per month)
F = 100,000(F/A,1.26%,24)
= 100,000{[(1 + 0.0126)24 –1]/0.0126}
= 100,000(27.8213)
= $2,782,130
Spreadsheet: = -FV(EFFECT(1.25%,10000),24,100000) displays $2,781,414
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