investor seeking a 15%) minimum rate of return. ,IOR, GRUR, and PVR for an 3-6 E
ID: 2810583 • Letter: I
Question
investor seeking a 15%) minimum rate of return. ,IOR, GRUR, and PVR for an 3-6 Economic consideration is being given for a proposal to drill a natu- ral gas well. All capital and operating costs are in thousands of dollars. Forecasted production is in thousands of mcf of gas and the pricing is in $/mcf. Year Production, mcf/year Price, $/mcf Royalty, % of Gross Revenue Operating Costs, $ Lease Bonus, $ Intangible Drilling Cost, S Tangible Completion Cost, $ 0 1,500 800 700500 3.00 3.00 3.00 3.00 12.5% 12.5% 12.5% 12.5% 75 50 40 40 1,500 2,500 3,250 Calculate the annual before-tax cash flow for years 0-4 and then deter- mine the NPV ROR, PVR, B/C Ratio, and Growth Rate of Return. Assume the investor has other opportunities to realize a 15% return on their investments. Finally, calculate the uniform gas selling price in years 1-4 ROR. Assume all costs remain as described. that would just provide the investor a 15% T Tiwo used machines can be acquired for $60,000 per machine to provideExplanation / Answer
Present Value (PV) of Cash Flow: (Cash Flow)/((1+i)^N) i=Discount Rate=15%=0.15 N=Year of Cash Flow Year wise cashflows and PV of cash flows are given below N Year 0 1 2 3 4 A Production in mcf 1,500,000 800,000 700,000 500,000 B Price ($/mcf) $ 3.00 $ 3.00 $ 3.00 $ 3.00 C=A*B Annual Revenue $ 4,500,000 $ 2,400,000 $ 2,100,000 $ 1,500,000 D Lease Bonus ($1,500,000) E Intangible drilling cost ($2,500,000) F Tangible drilling cost ($3,250,000) G=0.125*C Royalty ($562,500) ($300,000) ($262,500) ($187,500) H Operating Costs ($75,000) ($50,000) ($40,000) ($40,000) SUM I=C+D+E+F+G+H AnnualBefore tax cash flow ($1,500,000) $ (1,887,500) $ 2,050,000 $ 1,797,500 $ 1,272,500 $1,732,500 PV=I/(1.15^N Present Value of CashFlow ($1,500,000) $ (1,641,304) $ 1,550,095 $ 1,181,885 $ 727,556 $318,232 NPV=Sum of PV Net Present Value (NPV) $318,232 ROR (Rate of return)= Return/Investment J Total Investment $ 3,387,500 (1500000+1887500) K= Total Return $ 1,732,500 L=K/J ROR (Rate of Return)= 0.511439114 ROR 51% PVR (Present Value Return) M Present value of return $318,232 O Present Value of Investment $3,141,304 (1500000+1641304)) P=M/O PVR (Present Value Return) 0.101305562 PVR (Present Value Return) 10.13% Benefit/Cost Ratio (B/C ratio) Q Present value of Benefits $ 3,459,536 (1550095+1181885+727556) R Present value of Costs $ 3,141,304 (1500000+1641304) S=Q/R B/C Ratio 1.101305562 Growth rate of Return: R4 Return in Year 4 $ 1,272,500 R2 Return in Year 2 $ 2,050,000 n Number of Years= 2 g=((R4/R2)^(1/n))-1 Average Growth rate of Return -0.212134715 Growth rate of return (percentage) -21.21% Price $2.86304 If the investment just Provides the investor 15% Return: Net Present Value (NPV)=Zero N Year 0 1 2 3 4 A Production in mcf 1,500,000 800,000 700,000 500,000 B Price ($/mcf) $2.86304 $2.86304 $2.86304 $2.86304 C=A*B Annual Revenue $ 4,294,556 $ 2,290,430 $ 2,004,126 $ 1,431,519 D Lease Bonus ($1,500,000) E Intangible drilling cost ($2,500,000) F Tangible drilling cost ($3,250,000) G=0.125*C Royalty ($536,819) ($286,304) ($250,516) ($178,940) H Operating Costs ($75,000) ($50,000) ($40,000) ($40,000) SUM I=C+D+E+F+G+H AnnualBefore tax cash flow ($1,500,000) $ (2,067,264) $ 1,954,126 $ 1,713,610 $ 1,212,579 $1,313,051 PV=I/(1.15^N Present Value of CashFlow ($1,500,000) $ (1,797,621) $ 1,477,600 $ 1,126,726 $ 693,296 $1 The Required Price per mcf= $2.86304 The Required Price per mcf= $2.86 (Rounded to nearest cent)
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