Write a response for the following using the image Perform a sensitivity analysis of the proposed project to determine the impact on NPV and IRR for each of the following scenarios: 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. Most likely case: a natural gas price of $6.00 and a year 1 production rate of 900 MCF per day that declines by 20% per year after that. Worst case: a natural gas price of $3.00 and a year 1 production rate of 700 MCF per day that declines by 20% per year after that. Do breakeven sensitivity analysis to find each of the following: Breakeven natural gas price for an NPV = 0 Breakeven natural gas volume in year 1 for an NPV = 0 Breakeven investment for an NPV = 0 Given the results of your risk analysis in parts b and c, would you recommend this project? Explain your answer.

onocoPhillips's Cost of Capital for project 15.00% project life 10 years Solution Years 0 2 3 4 5 6 7 8 9 10 9 10 ivestment $ ,200,000 11 crease in NWC 145,000 0. 1429 0. 1749 0.0893 0.0893 0.0893 12 IACRS Depr Rate (7 year 0.2449 0. 1249 0.0445 13 atural Gas Wellhead Price (per MCF) $6 $6 $6 $6 $6 $6 $6 $6 $6 $6 900 720 576 461 389 295 236 189 151 121 14 olume (MCF/day) 15 ays per year 365 $3.00 $3.00 $3.00 $3.00 $3.00 $3.00 $3.00 $3.00 $3.00 16 ee to Producer of Natural Gas $3.00 17 ompression processing costs (per MCF) 0.65 0.65 0.65 0.65 0.65 0.65 0.65 0.65 0.65 0.65 18 19 ash Flow Calculations 20 atural Gas Wellhead Price Revenue 1,971,000 $ 1,576,800 $ 1,261,440 1,009,590 $ 808, 110 $ 646,050 $ 516,840 $ 413,910 $ 330,690 $ 264,990 21 ease fee expense 985,500 788,400 630, 720 504,795 404,055 323,025 258,420 206,955 165,345 132,495 28,707 22 ompression processing costs 213,525 170,820 136,656 109,372 87,545 69,989 55,991 44,840 35,825 53,400 23 epreciation expense 171,480 293,880 209, 880 149.880 107, 160 107, 160 107, 160 24 Net operating Profit 600,495 $ 323,700 $ 284, 184 $ 245,543 $ 209,350 $ 145,876 $ 95,269 $ 108, 715 $ 129,520 $ 103,788 25 ess: Taxes (40%) 26 Net operating profit after tax (NOPAT) 360,297 $ 194,220 $ 170,510 $ 147,326 $ 125,610 $ 87,526 $ 57, 161 $ 65,229 $ 77,712 $ 62,273 27 lus: Depreciation expense 171,480 293,880 209,880 149,880 107, 160 107, 160 107, 160 53,400 28 eturn of net working capital 29 Project Free Cash Flow $ (1,345,000) $ 531,777 $ 488, 100 $ 380, 390 $ 297,206 $ 232, 770 $ 194,686 $ 164, 321 $ 118,629 $ 77 , 712 $ 207,273 30 PV $280,305.20 31 RR 22.44% 32 2a-c. Scenario Summary Most Likely 33 Current Values Best Case Case Worst Case 34 Changing Cells 35 G Price $6 $8 $6 $3 36 roduction Rate 900 1200 900 700 37 Result Cells 38 PV $280,051 $ 1,440,400 $ 280,051 (645,791) 39 RR 22.43% 53.11% 22.43% 2.34% 40 otes: Current Values column represents values of changing cells at time Scenario Summary Report was created. 41 3. Breakeven Sensitivity Analsyis 42 Students should use Goal Seek in Excel to answer this question. 43 44 reakeven nautral gas price for an NPV = 0 $5.00 45 46 reakeven natural gas volume in Year 1 for an 704 47 PV = 0 48 49 50 reakeven investment for an NPV = 0 $1,573, 795