Calculate the After-Tax Cash Flow, NPV (at minimum ROR=20%) and ROR for the foll
ID: 2762819 • Letter: C
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
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 MACRS Rate 14.29% 24.49% 17.49% 12.49% 8.93% 8.92% 8.93% 4.46% Prodcution rate barrels 300,000 300,000 300,000 300,000 300,000 300,000 300,000 300,000 Selling price/barrel 45 49.50 54.45 59.90 65.88 72.47 79.72 87.69 NPV Details Acquisition of moneral rights (1,600,000) Intangible drilling cost (7,000,000) Equipment Cost (4,000,000) Total Investment in Assets (12,600,000) NWC investment (1,500,000) Revenue Per year 13,500,000 14,850,000 16,335,000 17,968,500 19,765,350 21,741,885 23,916,074 26,307,681 Operating Cost (1,500,000) (1,650,000) (1,815,000) (1,996,500) (2,196,150) (2,415,765) (2,657,342) (2,923,076) Royalty fees (2,025,000) (2,227,500) (2,450,250) (2,695,275) (2,964,803) (3,261,283) (3,587,411) (3,946,152) Depreciation (1,800,540) (3,085,740) (2,203,740) (1,573,740) (1,125,180) (1,123,920) (1,125,180) (561,960) Taxable Income 8,174,460 7,886,760 9,866,010 11,702,985 13,479,218 14,940,917 16,546,141 18,876,493 Tax @ 35% (2,861,061) (2,760,366) (3,453,104) (4,096,045) (4,717,726) (5,229,321) (5,791,149) (6,606,773) Post Tax income 5,313,399 5,126,394 6,412,907 7,606,940 8,761,491 9,711,596 10,754,992 12,269,720 PV factor @ 20% 1 0.833 0.694 0.579 0.482 0.402 0.335 0.279 0.233 PV od Cash Flows (14,100,000) 4,427,833 3,559,996 3,711,173 3,668,470 3,521,047 3,252,394 3,001,521 2,853,545 NPV = $ 13,895,977.91 Internal ROR Acquisition of moneral rights (1,600,000) Intangible drilling cost (7,000,000) Equipment Cost (4,000,000) Total Investment in Assets (12,600,000) NWC investment (1,500,000) Revenue Per year 13,500,000 14,850,000 16,335,000 17,968,500 19,765,350 21,741,885 23,916,074 26,307,681 Operating Cost (1,500,000) (1,650,000) (1,815,000) (1,996,500) (2,196,150) (2,415,765) (2,657,342) (2,923,076) Royalty fees (2,025,000) (2,227,500) (2,450,250) (2,695,275) (2,964,803) (3,261,283) (3,587,411) (3,946,152) Depreciation (1,800,540) (3,085,740) (2,203,740) (1,573,740) (1,125,180) (1,123,920) (1,125,180) (561,960) Taxable Income 8,174,460 7,886,760 9,866,010 11,702,985 13,479,218 14,940,917 16,546,141 18,876,493 Tax @ 35% (2,861,061) (2,760,366) (3,453,104) (4,096,045) (4,717,726) (5,229,321) (5,791,149) (6,606,773) Post Tax income 5,313,399 5,126,394 6,412,907 7,606,940 8,761,491 9,711,596 10,754,992 12,269,720 PV factor @ 43.95% 1 0.695 0.483 0.335 0.233 0.162 0.112 0.078 0.054 PV od Cash Flows (14,100,000) 3,691,142 2,473,937 2,149,908 1,771,590 1,417,489 1,091,492 839,708 665,490 NPV = $ 756.62 SO Internal rate or return is 43.95% at which rate the NPV is close to 0.
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