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Comparing Investments - Special Exercise

Comparing investment petroleum economics

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17 views

Comparing Investments - Special Exercise

Comparing investment petroleum economics

Uploaded by

aliantsya
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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WPV ECNCF

Comparing investments

The nominal net cash flows below are for two mutually exclusive oil developments.
Derive the NPVs for the table below and draw a graph of NPV against discount rate.
What is the NPV at 10% (10% is the bank rate and our discount rate)?
What are their internal rates of return?
IRR
Which project would you choose and why?
If we invested the net cash flow from the projects in the bank at 10% per year,
which project would give us the most wealth at the end of year 7? Prove this
by calculating the future value of each project at the end of year 6.

Time ME End years -

Net cash flow 1


Units 0
$MM -140.0
1
70.0doct2
50.0
u 3
40.0
u4
30.0
u5
20.0
6
10.0
Net cash flow 2 $MM -140.0 10.0 10.0 20.0 70.0 100.0 100.0
v v
n 9NPV1NPV2
using formula NPV
Discount rate $MM $MM
0%
10%
80 no
NPV
ECC
33 56 58.73 5873 3357
nT.tl fgntl
20%
30%
40% HE.in
50%
IRRs
22 18 NPV O
Time End years -
331 1 Units 0 1 2 3 4 5 6
Net cash flow 1 $MM -140.0 70.0 50.0 40.0 30.0 20.0 10.0
Future values 1 $MM
Total future value $MM

1 19am
Units
Time
0 1 2
End years -
3 4 5 6
Net cash flow 2 $MM -140.0 10.0 10.0 20.0 70.0 100.0 100.0
Future values 2 $MM
Total future value $MM

oau.a
6uu.ntfIfn
m.FI 58 73 64 UU U
Petroleum Economics Course by Guy Allinson - Copyright 2009

n 019 192
NPV at discount rate of 02 value
A project 2 has higher NPV
la
as
see 48.9.1

150
rate
not
Run

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H

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209

F P Itr

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me he

248 112 73 53 36 22 10
58

H
calculatefuturevalues I
7 140 1 01016
g n
n
g

i project 217
Choosen since

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repience
year
F P High
P FCHI present futurearmaine
P
P FLIES If D

F F PCHES
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