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Calculate the NPV for the following investment with 6 years life time assuming a discount rate of 20% per year:

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The investor is a Non-integrated petroleum company Total producible oil in the reserve is estimated to be 2,400,000 barrels Production rate will be 400,000 barrels of oil per year from year 1 to year 6

Mineral rights acquisition cost for the property will be $1,600,000 at time zero Intangible drilling cost (IDC) is expected to be $7,000,000 at time zero

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  • Tangible equipment cost is $4,000,000 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 (use the rates in table A-1 for 5-years half-year convention)

The production selling price is assumed $50 per barrel which has 10% escalation each year beginning in year 2 Operating cost is $1,500,000 annually with escalation rate of 10% beginning in year 2 Income tax is 35% Royalty is 15%

Note: for depletion cost calculation you can amortize the Mineral rights acquisition cost equally over 6 years. For this problem, you can assume that if the firm has negative income in a given year, then the income tax will also be negative. Thus, you should have a negative number for the income tax in Year 0.

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