Question 1 Green oil has a present project to execute, thus investing in a newly proved developed oil field, which could yield total revenue of $2.4b pa for the first 3 years of the multi-million projects. The project is labeled by world expects to be one of the most successfully executed within the Sub-Saharan African region. The purpose of the loan facility is to cover capital expenditure, operating expenditure and the development costs of the project. The project is in phases and spans successful exploration through to production and decommissioning. Green Oil has approached Global Solutions Commercial Bank for a loan facility of $2b initial capital to cover the first phase of the project (spanning 3 years) of the project. The project involves the purchase of drilling equipment, which will have a residual value of $240m at the end of the first phase. The projects variable cost is estimated at $1.4b with a corresponding annual fixed costs of $160m per annum for the first phase. a) Based on the above estimates, establish the viability of the project, assuming that all cash flows

occur at annual intervals and that Green Oil has a cost of capital of 15%. Lecturer: Dr Emmanuel Asare (2018) (Inkpen and Moffett, 2011; Dahl, 2015; BPP, 2018) b) Calculate the Loan life cover ratio (LLCR), which is given by; The NPV of projected net cash flows for each period during the period commencing on the relevant test date until the final maturity date of the loan(s); to The aggregate amount of facility outstanding, taking into account all account payments made on that date. Assuming the aggregate amount of facility outstanding is $50m, taking into account all account payments made till that date. c) Calculate the Project life cover ratio (PLCR). The PLCR is given by: The NPV of projected net cash flow for each period during the period commencing on the relevant test date and ending on the date on which field costs are equals the revenues, beyond which the costs will be greater than revenues; to The aggregate amount of facility outstanding, taking into account all account payments made on that date. Assume that Green Oil has no outstanding facility at this particular date. d) Calculate the third year Debt service cover ratio (DSCR), also a common feature on midstream and downstream projects. The DSCR is given by: Cash Available for Debt Service (CAFDS) in respect of a particular period; to Debt Service (DS) falling due in such period. Assume CAFDS at this point is $300m and (DS) falling due is $100m Note: You are required to interpret your results at each point. Lecturer: Dr Emmanuel Asare (2018) (Inkpen and Moffett, 2011; Dahl, 2015; BPP, 2018) e) State and explain at least 5 key performance indicators Global Solutions Commercial Bank will keep their eyes on with regards to the extended loan facility to Green Oil. Answer a. Calculating Project Viability (NPV calculation) Time Narration Cash flow 15% DF PV $m $m 0 Loan Facility (2,000) 1 (2000) 1 3 Revenue 2,400 2.283 5,479.2 1 3 Variable costs (1400) 2.283 (3,196.2) 1 3 Fixed costs (160) 2.283 (365.28) 3 Scrap value 240 0.658 157.92 ____________ 75.65 ____________ (6 marks) All things being equal, a project with a positive NPV should be accepted. Since the present project yields an NPV of $75.65m, it is viable and must there be accepted. b. Calculating the Loan life cover ratio (LLCR), which is given by; LLCR = NPV/ Aggregate Amount of Facility Outstanding LLCR = 75.64/(50 * 0.658) LLCR = 2.3:1 Comments: The NPV of the projected net cash flows for each period during the period commencing on the relevant test date until the final maturity date of the loan is able to cover the aggregate amount of facility outstanding; taking into account all account payments made on that date 2.3 times. (4 marks) Lecturer: Dr Emmanuel Asare (2018) (Inkpen and Moffett, 2011; Dahl, 2015; BPP, 2018 c) Calculating the Project life cover ratio (PLCR), which is given by; PLCR = IRR (NPV=0) /Aggregate Amount of Facility Outstanding Where the point at which the project field costs are equals the revenues is that point where the NPV is zero; thus the projects IRR. But IRR1 = 15%, When NPV1 = $75.64m Assuming IRR2 = 20%, NPV2 =? NPV2= (-2000 + [2400 1400 160 * 2.106] + 240 * 0.579) = -92 (2 marks) Therefore, IRR = 15% + 75.64/75.64+92 * (20 15) IRR = 17.26% (2 marks) At the projects IRR, NPV = 0 Aggregate Amount of Facility Outstanding = 0 Hence if the projects cost of capital rises beyond 17.26% and there is still some amount of Facility Outstanding (when all other payments have been deducted), Green oil will have difficulty fulfilling their loan obligations. (3 marks) d) Calculating the third year Debt service cover ratio (DSCR). DSCR = Third year Cash Available for Debt Service (CFADS); to Debt Service (DS) falling due in the third year period. Third year CFADS = 3000/1000 = 3:1 Comments: In the third year, for every $1 of debts outstanding, Green oil has $3 cash available to cover it, indicating a good liquidity position of the entity. (3 marks) Lecturer: Dr Emmanuel Asare (2018) (Inkpen and Moffett, 2011; Dahl, 2015; BPP, 2018) e) State and explain at least 5 key performance indicators Global Solutions Commercial Bank will keep their eyes on with regards to the extended loan facility to Green Oil