Question 4 (20 points): Calculate the After-Tax Cash Flow, NPV (at minimum ROR-1

Question

Question 4 (20 points): Calculate the After-Tax Cash Flow, NPV (at minimum ROR-10%) and ROR for the following investment with 6 years life time The investor is a Non-integrated petroleum company .Total producible oil in the reserve is estimated to be 1,800,000 barrel Production rate will be 300,000 barrel of oil per year from year 1 to year 6 Mineral rights acquisition cost for property would be S1,200,000 at time zero Intangible drilling cost IDC) is expected to be $5,000,000 at time zero Tangible equipment cost is $2,500,000 at time zero Working capital of S1,000,000 also at time zero Equipment depreciation will be based on MACRS 5-years life depreciation starting from year 1 to year 6 (consider rates exactly similar to the table A- for 5-years half-year convention) The production selling price is assumed $50 per barrel which has 8% escalation each year applicable from year 2 Operating cost is $2,000,000 annually with escalation rate of 6% starting from year 2 Income tax is 35% Royalty 15% Note: for depletion cost calculation you can amortize the Mineral rights acquisition cost equally over 6 years

Explanation / Answer

Year 0 1 2 3 4 5 6 Production rate 300000 300000 300000 300000 300000 300000 Selling price 50.000 54.000 58.320 62.986 68.024 73.466 Revenue 15000000 16200000 17496000 18895680 20407334 22039921 Operating Cost 2000000 2120000 2247200 2382032 2524954 2676451 Royalty @ 15% of revenue 2250000 2430000 2624400 2834352 3061100 3305988 Depreciation rate 20% 32% 19.20% 11.52% 11.52% 5.76% Depreciation 500000 800000 480000 288000 288000 144000 Amortization of Mineral rights acquisition cost 200000 200000 200000 200000 200000 200000 PBT 10050000 10650000 11944400 13191296 14333280 15713482 Tax @ 35% 3517500 3727500 4180540 4616954 5016648 5499719 PAT 6532500 6922500 7763860 8574342 9316632 10213763 Add: Dep + Amortization 700000 1000000 680000 488000 488000 344000 Less: Mineral rights acquisition 1200000 Less: Intangible drilling cost 5000000 Less: Tangible equipment cost 2500000 Less: Working Capital 1000000 -1000000 FCF -9700000 7232500 7922500 8443860 9062342.4 9804632.21 11557763.2 NPV @ 10% 28568180.66 ROR 79.44%

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