. Snappy Petroleum is planning to drill a well. The expected costs and revenues in terms...
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. Snappy Petroleum is planning to drill a well. The expected costs and revenues in terms of money in "Time 0" are: the drilling cost: $2,050.000; the variable costs of production: $19 per barrel; • the fixed costs: $234,000. All these costs are subject to inflation for the next years. • Cost inflation is 3% per year. The well is expected to produce for 20 years of economic life, beginning in "Time 1", with 90 barrels per day. • The production is expected to decrease at the rate of 10% per year. • The initial oil price (in "Time 0") is $82 per barrel, and it is expected that this price increases at the rate of 2% per year. • The Crown Royalty is 25% and Overriding Royalty is 10%. Note: If 7% increases by 1 percentage point, then you get 8%. If 7% increases by 1%, then you get 7.07%. The federal income tax rate is 30% and the provincial income tax amounts to 45% of the federal income tax. • The working interest in the well is 85%. The discount interest rate is 8%. (a) When does the well reach the end of its economic life? (b) Calculate the NPV and the IRR for 8%, 10%, and 12% discount rates. Discuss if it is worth Snappy Petroleum undertaking this project. (c) Using a Data Table command, determine the NPV for changes in initial daily production of -15%, -10%, -5%, 0%, 5%, 10%, and 15%. Use a discount rate of 8%. (d) Using a Data Table command, determine the NPV for changes in initial oil price of 15%, -10%, -5%, 0%, 5%, 10%, and 15%. Use a discount rate of 8%. (e) To which factor is the NPV more sensitive, to changes in the initial oil price or to changes in the initial daily production? Support your answer by a graph. What does it imply for Snappy Petroleum? (f) Using the Data Table command determine the NPV for changes in both initial oil price and variable cost, for changes of -15%, -10%, -5%, 0%, 5%, 10%, and 15%. Use a discount rate of 8%. . Snappy Petroleum is planning to drill a well. The expected costs and revenues in terms of money in "Time 0" are: the drilling cost: $2,050.000; the variable costs of production: $19 per barrel; • the fixed costs: $234,000. All these costs are subject to inflation for the next years. • Cost inflation is 3% per year. The well is expected to produce for 20 years of economic life, beginning in "Time 1", with 90 barrels per day. • The production is expected to decrease at the rate of 10% per year. • The initial oil price (in "Time 0") is $82 per barrel, and it is expected that this price increases at the rate of 2% per year. • The Crown Royalty is 25% and Overriding Royalty is 10%. Note: If 7% increases by 1 percentage point, then you get 8%. If 7% increases by 1%, then you get 7.07%. The federal income tax rate is 30% and the provincial income tax amounts to 45% of the federal income tax. • The working interest in the well is 85%. The discount interest rate is 8%. (a) When does the well reach the end of its economic life? (b) Calculate the NPV and the IRR for 8%, 10%, and 12% discount rates. Discuss if it is worth Snappy Petroleum undertaking this project. (c) Using a Data Table command, determine the NPV for changes in initial daily production of -15%, -10%, -5%, 0%, 5%, 10%, and 15%. Use a discount rate of 8%. (d) Using a Data Table command, determine the NPV for changes in initial oil price of 15%, -10%, -5%, 0%, 5%, 10%, and 15%. Use a discount rate of 8%. (e) To which factor is the NPV more sensitive, to changes in the initial oil price or to changes in the initial daily production? Support your answer by a graph. What does it imply for Snappy Petroleum? (f) Using the Data Table command determine the NPV for changes in both initial oil price and variable cost, for changes of -15%, -10%, -5%, 0%, 5%, 10%, and 15%. Use a discount rate of 8%.
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Answer rating: 100% (QA)
a The well reaches the end of its economic life after 20 years as stated in the problem b To calculate the NPV and IRR we need to discount the cash flows over the 20year period The cash flows consist ... View the full answer
Related Book For
Business Statistics
ISBN: 9780133899122
3rd Canadian Edition
Authors: Norean D. Sharpe, Richard D. De Veaux, Paul F. Velleman, David Wright
Posted Date:
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