Calculate the After-Tax Cash Flow, NPV (at minimum ROR=20%) and ROR for the foll

Question

Calculate the After-Tax Cash Flow, NPV (at minimum ROR=20%) and ROR for the following investment:

The investor is a Non-integrated petroleum company

Total producible oil in the reserve is estimated to be 2,400,000 barrel

Production rate will be 300,000 barrel of oil per year from year 1 to year 8

Mineral rights acquisition cost for property would be $1,600,000 at time zero Intangible drilling cost (IDC) is expected to be $7,000,000 at time zero

Tangible equipment cost is $4,000,000 at time zero Working capital of $1,500,000 also at time zero

Equipment depreciation will be based on MACRS 7-years life depreciation starting from year 1 to year 8 (consider rates exactly similar to the table A-1 for 7-years half-year convention)

The production selling price is assumed $45 per barrel which has 10% escalation each year applicable from year 2

Operating cost is $1,500,000 annually with escalation rate of 10% starting from year 2

Income tax is 35%

Royalty 15%

Explanation / Answer

Calculation of after tax cash flows and NPV and ROR Years Particulars 1 2 3 4 5 6 7 8 Production of Oil - Barrel 300000 300000 300000 300000 300000 300000 300000 300000 Selling Rate Per Barrel                     45.00                  45.00                  49.50                  54.45                  59.90                  65.88                  72.47                  79.72 Total Revenue - A          13,500,000        13,500,000        14,850,000        16,335,000        17,968,500        19,765,350        21,741,885        23,916,074 Less: Depreciation Rate 14.29 24.49 17.49 12.49 8.93 8.92 8.93 4.46 (MACRS - 7 Years Table-A) Property Value 4000000 4000000 4000000 4000000 4000000 4000000 4000000 4000000 Depreciation Value - B 571600 979600 699600 499600 357200 356800 357200 178400 Operating Cost    - C 1500000 1500000 1650000 1815000 1996500 2196150 2415765 2657342 Royalty - 15% - D             2,025,000          2,025,000          2,227,500          2,450,250          2,695,275          2,964,803          3,261,283          3,587,411 Net Profit Before Tax             9,403,400          8,995,400        10,272,900        11,570,150        12,919,525        14,247,598        15,707,637        17,492,921 (A-B-C-D) Less: Income Tax @ 35%             3,291,190          3,148,390          3,595,515          4,049,553          4,521,834          4,986,659          5,497,673          6,122,522 Net Profit after tax - I             6,112,210          5,847,010          6,677,385          7,520,598          8,397,691          9,260,938        10,209,964        11,370,399 Add: Depreciation   - II (Non - Cash Expenditure) 571600 979600 699600 499600 357200 356800 357200 178400 Total Cash Inflow per year             6,683,810          6,826,610          7,376,985          8,020,198          8,754,891          9,617,738        10,567,164        11,548,799 (I+II) PV Factor @ 20% 0.83333 0.69444 0.57870 0.48225 0.40188 0.33490 0.27908 0.23257 Present Valume of Cash Inflow       5,569,841.67    4,740,701.39    4,269,088.54    3,867,765.00    3,518,394.44    3,220,961.12    2,949,101.60    2,685,881.46 Total Cash Inflow          30,821,735 Less: Initial Cash Outflow Mineral Rights 1600000 Intangible drilling cost 7000000 Tangible Equipment 4000000 Working Capital 1500000 Total          14,100,000

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