Question

Calculate the After-Tax Cash Flow, NPV (at minimum ROR=20%) 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 2,400,000 barrel

-Production rate will be 400,000 barrel of oil per year from year 1 to year 6

-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 $3,000,000 at time zero

-Working capital of $1,500,000 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-1 for 6-years half-year convention)

-The production selling price is assumed $50 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 40%

-Royalty 15%

Note: for depletion cost calculation you can amortize the Mineral rights acquisition cost equally over 6 years.

Answer 1

Initial Cost
Mineral Right Property Cost			1600000
Intangible Drilling Cost			7000000
Tangible Equipment Cost			3000000
Working Capital			1500000
Total Cash Outflow			13100000
Depreciation Per Year		3000000/6	=	500000
		1600000/6	=	266666.7
			TOTAL	766666.7
Year	1	2	3	4	5	6
Oil Produced	400000	400000	400000	400000	400000	400000
Selling Price	50	55	60.5	66.55	73.205	80.52
Total Sales	20000000	22000000	24200000	26620000	29282000	32208000
Operating Cost	1500000	1650000	1815000	1996500	2196150	2415765
EBIT	18500000	20350000	22385000	24623500	27085850	29792235
Less:- Dep	766666.7	766666.7	766666.7	766666.7	766666.7	766666.7
EBIT after Dep	17733333	19583333	21618333	23856833	26319183	29025568
Less:- Loyalty	3000000	3300000	3630000	3993000	4392300	4831200
Net Earnings	14733333	16283333	17988333	19863833	21926883	24194368
Less:- Tax @ 40%	5893333	6513333.3	7195333.3	7945533	8770753	9677747
EAT	8840000	9770000	10793000	11918300	13156130	14516621
ADD :- Dep	766666.7	766666.7	766666.7	766666.7	766666.7	766666.7
AFTER TAX CASH FLOW	9606667	10536667	11559667	12684967	13922797	15283288
PVF@20%	0.833333	0.6944444	0.5787037	0.482253	0.401878	0.334898
Present Value	8005556	7317129.6	6689621.9	6117364	5595260	5118342
PV of Cash inflow	38843273		ROR =	296.5135	In 6 years
Cash Outflow	13100000			49.41892	per year
NPV	25743273