Question

1. An oil company was evaluating the economic performance of one of its recompleted wells to decide whether to abandon it. The company uses 10% MARR or hurdle rate. The well is expected to produce for another 5 years. Year 1 post recompletion revenue was $500,000. Annual revenues are anticipated to drop by $50,000 each year starting in year 2.

a) What is the forecast revenue for year 4?

b) What is the equivalent annual worth of the revenue for the five year period?

2. A large building HVAC system has an estimated life expectancy of 12 more years. Replacement at that time is expected to cost $350,000. The building engineer is considering a plan to set aside equal annual deposits into a fund bearing 8 percent annual interest so that $350,000 will be on hand in 12 years. If he is ready to make a deposit right now, what equal amounts should he deposit now and for each of the next twelve years?

Answer 1

1a)   Forecast revenue for year 4
Year 1	$500000
Year2	$450000
Year 3	$400000
Year 4	$350000
Year 5	$300000.
Forecast revenue for year 4 is $350000

1b)   Equivalent annual worth of the revenue will be Year
year	Cash flow	Present value@10%	Discounted cash flow
1	5,00,000	0.909	4,54,500
2	4,50,000	0.826	3,71,700
3	4,00,000	0.751	3,00,400
4	3,50,000	0.683	2,39,050
5	3,00,000	0.621	1,86,300
Present value Discounted cash flow			15,51,950

2)

Future value of Replacement Cost = Annual deposits Amount {((1+interest rate)^No of Year-1)/ Interest rate}

350,000=Annual deposits Amount {((1+.12)^12)-1/ 0.12

350000=Annual deposits Amount (24.13313)

Annual deposits Amount =$14502.88