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Problem 1: (20 points) Production data from a well has depleted drastically. To avoid shutting in the well, the production engineer has suggested to invest a gas lift pump with price of $500,000. By installing the pump, it is estimated that the production is economical for the next 4 years with the following revenue: Time, year Rev., $ 1 580,000 2 470,000 3 360,000 4 270,000 Operating cost is estimated to be $100,000 for the first year, increasing $20,000 annually due to the pump maintenance cost. Also, Tax is 40% of the Net Operating Income. Based on the Net Cash Flow model: a) What is the undiscounted payout time? (10 points) b) What is the bail-out time if the salvage value is $250,000 at year 1 and decreases $100,000 annually for the following years? (10 points) Problem 2: (15 points) For the following economic analysis table. calculate the following yardsticks: 1) Undiscounted profit to investment (5 points) 2) Discounted payout (5 points) 3) Discounted return of investment (5 points) OPEX Cum. NCF PV NPV Invest. Revenue, NOIAFT NCF Time $ $ $ $ $ $ $ $ Year 5,000,000 -5,000,000 -5,000,000 -5,000,000 -5,000,000 1 6,000,000 1,000,000 3,750,000 3,750,000 -1,250,000 3,260,870 -1,739,130 4,000,000 1,200,000 2,100,000 2,100,000 850,000 1,587,902 -151,229 2 3 3,000,000 1,400,000 1,200,000 1,200,000 2,050,000 789,019 637,791 Problem 3: (20 points) Your boss comes with 2 scenarios for developing an oil field for the next 3 years Based on the available data, which scenario is suggested to your boss? Why? Operating Cost: 1,000,000 $/year and constant over the life of the project. Tax: 25% of net operating income Annual Discount Rate: 12% Hint 1: Round each calculation to the nearest thousand dollar. Hint 2: Priority of Yardsticks: NPV > Disc. P:I > Disc. Payout Scenario 1: Year Inv. Revenue, $ 4,400,000 1 6,628,000 2 4,120,000 3 3,552,000 Total 4,400,000 14,300,000 Scenario 2: Year Inv. Revenue, $ 2,200,000 1 2,200,000 3,500,000 2 5,600,000 3 5,200,000 Total 4,400,000 14,300,000 Problem 4: (10 points) Your company is planning to make an investment to drill a well in a new oil field. Hewever, to evaluate the risk of losing money, you are considering options of 1) invest alone, 2) farm-out with company A. 3) farm-out with company B. or 4) sell the project to company C. The maximum NPV gain (success of the project) and NPV loss (dry hole) for each option is available as following. a) For what percentage of success you suggest to farm-out with company B? (5 points) b) For what percentage of success you suggest the stand alone? (5 points) Outcome Stand Alone Share with A Share with B Sell to c Dry hole -3 MMS -1.5 MMS MMS 0.25 MMS Discovery 3 MMS 1.4 MMS 0.85 MMS 0.40 MMS 3 2 1 : -2 3 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 Problem 5: (20 points) The economic analysis for a project is given as: Time, year Investment, $ NCF, $ 1,500,000 -1,500,000 0.5 1,000,000 -500,000 I 1,400,000 2 1,000,000 3 600,000 a) What is the Internal Rate of Return (IRR)? (10 points) b) If the average investment opportunity rate is 15%, what is the Modified IRR? (10 points) Problem 6: (15 points) house. years plan was received for purchasing A loan of $400,000 with 5% APR for 30 a new The home owner paid the mortgage for 10 years monthly on time. After 10 years, the home owner's request to refinance the rest of the loan for the next 20 years was approved with 4% APR. After 10 years of paying of the loan with 4% APR, the home owner's request to refinance the rest of the loan for the last 10 years was approved with 3% APR. What is the mortgage for the last 10 years?

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