WONDAENERGY plc formed in 1995 and specialise in oil exploration and production. Last year the company made sales of over 700 million and achieved a net profit pre-tax of 68 million, based on an equity employed of 240 million, as announced in the annual report for their year ended 31 December 2022. The company has the option to enter into an agreement with the government of Boaland (a country with a developing economy but rich in natural resources) to develop and produce oil from the recently discovered Swift field. The government's geologists believe that there are 3,200,000 barrels of oil in this specific off-shore field under consideration. The contract states that all development, production and transportation operations will be the responsibility of WONDAENERGY but that 40% of any oil extracted will be the property of the Bravaland government. The government will pay their share of costs (i.e. 40% ) but only those relating to the variable costs of production and the transportation costs. WONDAENERGY's geologists believe that they are confident that 70% of the reserves predicted by the government are certain. WONDAENERGY's geologists estimates should be used in all calculations. The company will only extract the oil and transport it to the wholesale market on the mainland. Production is expected to be released from the field as 3%;2032 2\% The price of oil at present at the wholesale market is 60 per barrel. The variable costs af production are 31 per barrel. The company has already undertaken initinl exploration research costing 500,000 of which 60% has been paid and the remainder will be paid at the start of 2024 . There are incremental fixed costs atrached to the propect of $1,400,000 per annum regarding support costs for the proped ance production commences in addition to this there are transportation costs, which is an area of difficulty to the company as there is no oil pipe network within the near vicinity. The company has therefore outsourced this to a tanker traneportation company who specialise in moving oil from source to market. Howner, the costs being charged is a fixed cost based on volumes extracted each year The costs behave in a stepped fashion at 500,000 for the first 300,000 barrels af oll transported in a year jumping to 900,000 for volumes over this. In addition to these couts there will be development costs of 750,000 in 2024 . On completion of prodtiction there are environmental reinstatement costs of 1,300,000. There will be initial capital expenditure of 9,000,000 at the start of 2024 to set-up and equp the driling sites. It is estimated that the lease when operational will have a ite oycle of 8 years and be capped and reinstated when production ceases. At the Croo, 000: thare quoted above are at current prices. Cost inflation is expected to be 1.8% for annum and is also relevant to the disposal value of the non-current assets. The oil prices are likely to rise by 1.6%. The company at present uses a pre-tax market cost of capital of 11.3%. Taxation should be ignored in all calculations. Required: a) Calculate the net present value and internal rate of return for the project as outlined above and based on WONDAENERGY's geologists forecast, which offers a more prudent estimate that we can have confidence in. b) Some of the directors are somewhat risk averse in regard to this new investment. Two main concerns are held regarding the project: - The percentage of good reserves as predicted by the company's geologists - The anticipated price of oil per barrel Using the same spreadsheet model that you have applied in part a) manipulate the data in order to provide a two-way table that would show the outcomes of the company's geologists predictions of certain reserves being 85%, as given, 65% and 55% of their original estimates as well as the variable cost of production per barrel being 10%, as given, +5% and +10% of the existing price. c) The directors believe that the probabilities attached to these uncertainties are as follows: From the above information analyse the data to provide both a risk neutral and a risk averse approach to the project and advise management based on all your findings. d) The directors wish you to have a breadth of consideration in your reporting to allow for other financial and non-financial factors that should be considered. You are requested to undertake this analysis and present your findings to the directors in week 12. Please remit an electronic copy of your findings (a report of no more than 800 words as well as the spreadsheet model you have constructed) to vour seminar tutor hv Fridav 20th November 2023 Anv From the above information analyse the data to provide both a risk neutral and a risk averse approach to the project and advise management based on all your findings. d) The directors wish you to have a breadth of consideration in your reporting to allow for other financial and non-financial factors that should be considered. You are requested to undertake this analysis and present your findings to the directors in week 12. Please remit an electronic copy of your findings (a report of no more than 800 words as well as the spreadsheet model you have constructed) to your seminar tutor by Friday 20th November 2023. Any questions pertaining to the project should be addressed to the directorate's discussion site on GCU Learn