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3-55 What is the maximum amount that we can bid for an offshore lease if we have a 20% investment opportunity rate (and assume we can predict exactly what will happen)? Assume annual compounding. The timing of the investments and the production schedule are contained in the following tables. Do your analysis BFIT. Time 0= BID End of 1 year: Drill exploratory well at cost of $2 MM. End of 1.5 years: Drill delineation well at a cost of $1.5 MM. End of 2 years: Drill delineation well at a cost of $1.5 MM. End of 2.5 years: Begin platform construction at a cost of $10 MM. End of 3 years: Continue platform construction at a cost of $10 MM. End of 3.5 years: Install pipeline cost = $2 MM. End of 4 years: Set platform - cost = $1 MM. End of 4.5 years: Drill and complete wells = $20 MM. Commence production. See production schedule. Assume end of period discounting for annual cash flow from PRODUCTION SCHEDULE Annual Production NCF Year (Bbl) (M$) 5 1,300,000 32,500 6 1,300,000 32,500 7 1,100,000 27,500 8 667,000 16,675 9 404,000 10,100 10 245,000 6,125 11 150,000 3,750 12 90,000 2,250 13 50,000 1,250 14 33,000 825 15 20,000 500 End of 15 years: Salvage Value = abandonment costs The present value of the production, discounted at 20%, at the beginning of year 5 (end of year 4) is $98 MM. 3-55 What is the maximum amount that we can bid for an offshore lease if we have a 20% investment opportunity rate (and assume we can predict exactly what will happen)? Assume annual compounding. The timing of the investments and the production schedule are contained in the following tables. Do your analysis BFIT. Time 0= BID End of 1 year: Drill exploratory well at cost of $2 MM. End of 1.5 years: Drill delineation well at a cost of $1.5 MM. End of 2 years: Drill delineation well at a cost of $1.5 MM. End of 2.5 years: Begin platform construction at a cost of $10 MM. End of 3 years: Continue platform construction at a cost of $10 MM. End of 3.5 years: Install pipeline cost = $2 MM. End of 4 years: Set platform - cost = $1 MM. End of 4.5 years: Drill and complete wells = $20 MM. Commence production. See production schedule. Assume end of period discounting for annual cash flow from PRODUCTION SCHEDULE Annual Production NCF Year (Bbl) (M$) 5 1,300,000 32,500 6 1,300,000 32,500 7 1,100,000 27,500 8 667,000 16,675 9 404,000 10,100 10 245,000 6,125 11 150,000 3,750 12 90,000 2,250 13 50,000 1,250 14 33,000 825 15 20,000 500 End of 15 years: Salvage Value = abandonment costs The present value of the production, discounted at 20%, at the beginning of year 5 (end of year 4) is $98 MM