Name:-

EIGUEDO, RICHARD OSEYOMON

Mat. Number:- G2006/ M.ENG/ MECH/ 220 Dept:MECHANICAL ENGINEERING (TFE OPTION)

Course Code:- MEG 603.1 Course Title:ADVANCED ENGINEERING MANAGEMENT.

Assignment 1:- CASH FLOW CALCULATIONS AND SENSITIVITY ANALYSIS.

OCTOBER 20, 2007.

CASH FLOW CALCULATIONS Year Annual Production (x 106 Barrels) Capex Opex (US$ x 106 ); i) Overhead on Capex ii) Production Costs Initial Reserves (x 106 Barrels) Royalty Income Tax Crude Oil Revenue 1 40 20 2 60 30 3 10 40 20 10 4 30 10 5 20 5 30 20 6 20 15 7 10 10

100 10% of Fiscal Crude Oil 70% of Taxable Income US$ 10 per Barrel for income as well as for fiscal purposes.

Using the data given above, the Cash Flow calculation follows in Table 1. Note that values enclosed in brackets are negatives through out the Tables. Reading from the table, the present Value of the Venture is US$ 18.84 Million. EARNING POWER. Using the Mid-year Discount Factors. For year 1, For year 2, For year 3, For year 4, For year 5, For year 6, For year 7, n = 1; n = 2; n = 3; n = 4; n = 5; n = 6; n = 7; Hence t = Hence t = Hence t = Hence t = Hence t = Hence t = Hence t =
2 * 1 1 2 2 * 2 1 2 2 * 3 1 2 2 * 4 1 2 2 * 5 1 2 2 * 6 1 2 2 * 7 1 2

= 0.5 = 1.5 = 2.5 = 3.5 = 4.5 = 5.5 = 6.5

Now the Discount Factor (DF) = (1 + r)-t Using the Discount Rates 0%, 10%, 20%, 30%, 40%, 50%, 60% and 70%, the Discount Factors are tabulated in Table 2. The Discounted Cash flow thus follows in Table 3. Now plotting the present Value Cash Surplus against the Discount rate, the Earning Power is determined. This is the Intersection of the curve at the xaxis. The x value is determined. Earning Power is 25% as shown in Figure 1.

SENSITIVITY ANALYSIS Given:Royalty Rate = 10% = 0.1 Unit Price Tax Rate = US$ 10 = 70% = 0.7

Changes In Tax Rate ( 30% to 60%); PVCS = PV[(1-Royalty Rate) * (Price x Production) + (Depreciation + Opex) * Tax Rate] Using Royalty Rate = 10% = 0.1 and Unit Price = US$ 10 PVCS = PV[0.9*10*Production + (Depreciation + Opex) * Tax Rate PVCS = 9 * Production + (Dep. + Opex)* Tax Rate For Details of Calculations of Change in Sensitivity due to changes in Tax Rate, refer to Table 4. A plot of the Sensitivities against the Discount Rates is shown in Figure 2.

Changes In Royalty Rate ( 30% to 60%); PVCS = -PV[(1-Tax Rate) * (Price x Production) * Royalty Rate] Using Tax Rate = 70% = 0.7 and Unit Price = US$ 10, Roy Rate = 10% PVCS = -PV[0.3 * 10 * Production * Royalty Rate] PVCS = -PV[3 * Production * Royalty Rate] PVCS = -3 PV (Revenues) * Roy Rate For Details of Calculations of Change in Sensitivity due to changes in Royalty Rate, refer to Table 5. A plot of the Sensitivities against the Discount Rates is shown in Figure 3.

Changes In Opex ( 30% to 60%); PVCS = - (1-Tax Rate) * PV( Opex) Using Tax Rate = 70% = 0.7 PVCS = - (0.3 * PV( Opex) PVCS = - 0.3 * PV( Opex) For Details of Calculations of Change in Sensitivity due to changes in Opex, refer to Table 6. A plot of the Sensitivities against the Discount Rates is shown in Figure 4. Table 7 is a combination of the changes, and the Distribution plot is in Figure 5.