I have recieved a project of accounting for managers and i seek help with it. below is the question:
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Wellbore Drilling Company The Wellbore Drilling Company, herein after WDC or \"the company\" is based in South Eastern Alberta. WDC provides drilling services to Oil and Gas development firms with drilling rights in the Western Canadian Sedimentary Basin and in the Bakken shale deposit located in the North Western United States. WDC provides drill rigs and the related personal needed to drill oil and gas wells on properties owned by the Oil and Gas companies. WDC is paid on a daily rate for the use of their equipment and personal. The company is only paid while actually drilling the wells. It is not paid for the time needed to set up or to take down the equipment once the well is drilled. By way of example if the company takes 10 days to drill the well and the day rate is $10,000, they are paid 10 days X the agreed upon rate ($10,000) or $100,000. The company has prepared a Budgeted Balance Sheet and income Statement for 2022 based on expected sales and the well drilling equipment they currently have. Exhibit A They have the opportunity to purchase a new dill rig. This new drill rig, can drill wells to a depth of 5,000 meters. This new drill rig would give WDC an advantage over their competition when seeking new drilling contracts. The details of the purchased opportunity are presented at Exhibit B. The WDC has less than 30 days to make a decision if they expect to have the new drill rig ready for use by the start of 2022. Required Management of the company have asked for your advice. Should they, or should they not, purchase the new drill rig? Your answer must be supported. At a minimum this should include cash budgets and budgeted income statements related to the new purchase. You might also include Net present value calculations related to the new purchase to support your purchase decision. Calculating Key financial ratios ( ROA, ROE, D:E) would be as asset in supporting your conclusion. NOTE: for any Net present value calculations you can assume that any cash generated by the new drill rig in 2022, it will be the same in each of the subsequent years for the expected life of the new drill rig. Example, if cash budget for the new rig in 2022 is $100,000, you can assume the same cash will be generated by the new drill rig in each of the 9 subsequent years. So, over the life of the asset, total cash is $100,000 X 10 years. Exhibit A Wellbore Drilling Company Wellbore Drilling Co. Budget Balance Sheet December, 31 2022 Cash Accounts receivable Supplies Drilling Equipment accumulated depreciation Budgeted Income Statement December 31, 2022 Revenues Direct labour Direct supplies used 5,000,000 3,250,000 1,250,000 9,500,000 25,000,000 12,500,000 12,500,000 22,000,000 12,000,000 5,000,000 2,200,000 7,200,000 Gross margin Expenses Administrative overhead Executive salaries Depreciation Interest 4,800,000 600,000 850,000 2,500,000 300,000 4,250,000 Profit 550,000 Accounts Payable Bank loans Equny 1,250,000 W 7,500,000 8,750,000 13,250,000 22,000,000 Exhibit B Details of proposed purchase of new drill rig Cost of Drill Rig $7,000,000 Useful life of new drill rig 10 years Estimated value at end of useful life $750,000 Annual depreciation - $625,000 Purchase details Cash $2,000,000 New loan $ 5,000,000 Repayable in annual instalments of $500,000 plus interest at 6% Operational details Number of operational days optimistic pessimistic 15t Quarter 35 30 2"d Quarter 20 15 3'd Quarter 20 10 4th Quarter 55 25 Revenue per operating day $27,000 Costs per operating days Wage costs - 12 employees at $800 each per day Direct supplies per day $6,000 Other costs Drill rig manger $140,000 per year Insurance $120,000 per year
