COP) Natural Gas and Gas Products Department (NG& GP) man-ages all of the company€™s activities relating to the gathering, purchasing, processing, and sale of natural gas and gas liquids. Chris Simpkins, a recent graduate, was recently hired as a financial analyst to support the NG& GP department. One of Chris€™s first assignments was to review the projections for a proposed gas purchase project that were made by one of the firm€™s field engineers. The cash flow projections for the ten-year project are found in Exhibit P3-12.1 and are based on the following assumptions and projections
The investment required for the project consists of two components: First, there is the cost to lay the natural gas pipeline of $ 1,200,000. The project is expected to have a ten-year life and is depreciated over seven years using a seven-year modified accelerated cost recovery system (MACRS). 20 Second, the project will require a $ 145,000 increase in net working capital that is assumed to be recovered at the termination of the project.
The well is expected to produce 900,000 cubic feet (900 MCF) per day of natural gas during year 1 and then decline over the remaining nine-year period (365 operating days per year). The natural gas production is expected to decline at a rate of 20% per year after year 1.
In addition to the initial expenditures for the pipeline and additional working capital, two more sets of expenses will be incurred. First, a fee consisting of 50% of the wellhead natural gas market price must be paid to the producer. In other words, if the wellhead market price is $ 6.00 per MCF, 50% (or $ 3.00 per MCF) is paid to the producer. ­Second, gas processing and compression costs of $ 0.65 per MCF will be incurred.
There is no salvage value for the equipment at the end of the natural gas lease.
The natural gas price at the wellhead is currently $ 6.00 per MCF.
The cost of capital for this project is 15%. Answer the
Answer the folowing questions.
a. What are the NPV and IRR for the proposed project, based on the forecasts made above? Should Chris recommend that the project be undertaken? Explain your answer. What reservations, if any, should Chris have about recommending the project to his boss? b. Perform a sensitivity analysis of the proposed project to determine the impact on NPV and IRR for each of the following scenarios:
1. Best case: a natural gas price of $ 8.00 and a year 1 production rate of 1,200 MCF per day that declines by 20% per year after that.

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$ 1,200,000 145,000 rate prioe $ 6.00 600 600 Fee to producer of natural gas (per MCF $ 3.003.00 300 Cash Flew Caleuhutions Natural gas wellhead price revenue Lease fee expense Compression and processing costs Depreciation expenses 1.971.000 $1576,800 $1.261.40 Less taxes (40%) Net operating profit after tax (NOPAT) 240,195)(129,48(113,674) Return of net working capital Project free cash Bow 1.345000)531777 488100 380,390 00893 00893 0,0893 00445 600 600 600 600 600 189 600 600 3.00 3003.00 $ 300 3003.00 3,00 1,009,152 $807322 $65857 3516.686 $413.349 330,679 $264.543 04576 403,661 322929258343 109325 87460 49.880 107.160 07,160 107180 245 371 209.04 145,801 98148) (83616) 58,320) (38083) (43398 (51,806) 41.445) 47.22312542 49 80 0160 107.160 1 206,674 165 339 69968 55974 44,779 5,824 5 20908495 129516 103613 7480 7125 6507 77.10 57.125 62.168 0716 3,400 145,000 $297,103 $232585 194,640 $164285 $118,497 77.710 S207,168