Calculate the AfterTax Cash Flow NPV at minimum ROR20 and RO

Calculate the After-Tax Cash Flow, NPV (at minimum ROR=20%) and ROR for the following investment with 6 years life time:

-The investor is a Non-integrated petroleum company

-Total producible oil in the reserve is estimated to be 2,400,000 barrel

-Production rate will be 400,000 barrel of oil per year from year 1 to year 6

-Mineral rights acquisition cost for property would be $1,600,000 at time zero

-Intangible drilling cost (IDC) is expected to be $7,000,000 at time zero

-Tangible equipment cost is $3,000,000 at time zero

-Working capital of $1,500,000 also at time zero

-Equipment depreciation will be based on MACRS 5-years life depreciation starting from year 1 to year 6 (consider rates exactly similar to the table A-1 for 6-years half-year convention)

-The production selling price is assumed $50 per barrel which has 10% escalation each year applicable from year 2

-Operating cost is $1,500,000 annually with escalation rate of 10% starting from year 2

-Income tax is 40%

-Royalty 15%

Note: for depletion cost calculation you can amortize the Mineral rights acquisition cost equally over 6 years.

Solution

Initial Cost Mineral Right Property Cost 1600000 Intangible Drilling Cost 7000000 Tangible Equipment Cost 3000000 Working Capital 1500000 Total Cash Outflow 13100000 Depreciation Per Year 3000000/6 = 500000 1600000/6 = 266666.7 TOTAL 766666.7 Year 1 2 3 4 5 6 Oil Produced 400000 400000 400000 400000 400000 400000 Selling Price 50 55 60.5 66.55 73.205 80.52 Total Sales 20000000 22000000 24200000 26620000 29282000 32208000 Operating Cost 1500000 1650000 1815000 1996500 2196150 2415765 EBIT 18500000 20350000 22385000 24623500 27085850 29792235 Less:- Dep 766666.7 766666.7 766666.7 766666.7 766666.7 766666.7 EBIT after Dep 17733333 19583333 21618333 23856833 26319183 29025568 Less:- Loyalty 3000000 3300000 3630000 3993000 4392300 4831200 Net Earnings 14733333 16283333 17988333 19863833 21926883 24194368 Less:- Tax @ 40% 5893333 6513333.3 7195333.3 7945533 8770753 9677747 EAT 8840000 9770000 10793000 11918300 13156130 14516621 ADD :- Dep 766666.7 766666.7 766666.7 766666.7 766666.7 766666.7 AFTER TAX CASH FLOW 9606667 10536667 11559667 12684967 13922797 15283288 PVF@20% 0.833333 0.6944444 0.5787037 0.482253 0.401878 0.334898 Present Value 8005556 7317129.6 6689621.9 6117364 5595260 5118342 PV of Cash inflow 38843273 ROR = 296.5135 In 6 years Cash Outflow 13100000 49.41892 per year NPV 25743273