An oil company has a concession agreement with a host government of an oil field. The gross
Question:
An oil company has a concession agreement with a host government of an oil field. The gross revenues, capital expenditures and operating expenditures are given in Table 2. The concession fiscal terms are: Government’s royalty rate is 10 %, Income tax rate is 30 %, and Depreciation for CAPEX is 5-years, straight line, commencing when production begins.
Table 2: The gross revenues, capital and operating expenditures for the field.
Parameter | Year | |||||
1 | 2 | 3 | 4 | 5 | 6 | 7 |
Field’s Gross Revenue (USD Mil.) | 150 | 250 | 450 | 350 | 250 | 200 |
CAPEX (USD Mil.) | 250 | 250 | 100 | |||
OPEX (USD Mil.) | 30 | 35 | 50 | 40 | 35 | 35 |
(a) Determine the yearly net cash flow for the oil company.
(b) Determine internal rate of return (IRR) for the cash flow
(c) Determine the net present value (NPV) at the company’s hurdle rate of 20%
(d) Explain the meaning of IRR and NPV results to the oil company.
Data Analysis and Decision Making
ISBN: 978-0538476126
4th edition
Authors: Christian Albright, Wayne Winston, Christopher Zappe