An oil company has installed an offshore production facility for $10 million in
ID: 1141573 • Letter: A
Question
An oil company has installed an offshore production facility for $10 million in year 1. The annual maintenance cost of the facility is $60,000 per year for the 2nd year, increasing by $10,000 per year for the next 9 years. In the 12th year, a major overhaul is conducted at a cost of $500,000. The overhaul helped in keeping maintenance costs fixed at $150,000 per year for the remaining 10 years. At the end of 22 years, the facility is sold for a sum of $2 million. If the market interest rate is 8% per year, calculate the present value at year 0 of all the costs over the 22-year period.
Explanation / Answer
ANSWER:
installation cost in year 1 = $10,000,000
annual maintenance cost from year 2 = $60,000
increase in annual costs per year from year 3 till year 11 = $10,000
major overhaul cost in year 12 = $500,000
annual maintenance cost from year 13 to year 22 = $150,000
selling price at he end of year 22 = $2,000,000
i = 8%
n = 22 years
pv = installation cost in year 1(p/a,i,n) + annual maintenance cost in year 2(p/f,i,n) + annual maintenance cost in year 2(p/f,i,n) + annual maintenance cost in year 2(p/f,i,n) + annual maintenance cost in year 2(p/f,i,n) + annual maintenance cost in year 2(p/f,i,n) + annual maintenance cost in year 2(p/f,i,n) + annual maintenance cost in year 2(p/f,i,n) + annual maintenance cost in year 2(p/f,i,n) + annual maintenance cost in year 2(p/f,i,n) + annual maintenance cost in year 2(p/f,i,n) + major overhaul cost in year 12(p/f,i,n) + maintenance cost from year 13(p/f,i,n) + maintenance cost from year 13(p/f,i,n) + maintenance cost from year 13(p/f,i,n) + maintenance cost from year 13(p/f,i,n) + maintenance cost from year 13(p/f,i,n) + maintenance cost from year 13(p/f,i,n) + maintenance cost from year 13(p/f,i,n) + maintenance cost from year 13(p/f,i,n) + maintenance cost from year 13(p/f,i,n) + maintenance cost from year 13(p/f,i,n) + selling price at the end of 22 years(p/f,i,n)
pv = -10,00,000(p/a,8%,1) - 60,000(p/f,8%,2) - 70,000(p/f,8%,3) - 80,000(p/f,8%,4) - 90,000(p/f,8%,5) - 100,000(p/f,8%,6) - 110,000(p/f,8%,7) - 120,000(p/f,8%,8) - 130,000(p/f,8%,9) - 140,000(p/f,8%,10) - 150,000(p/f,8%,11) - 500,000(p/f,8%,12) -150,000(p/a,8%,13) -150,000(p/a,8%,13) -150,000(p/a,8%,13) -150,000(p/a,8%,13) -150,000(p/a,8%,13) -150,000(p/a,8%,13) -150,000(p/a,8%,13) -150,000(p/a,8%,13) -150,000(p/a,8%,13) -150,000(p/a,8%,13) + 2,000,000(p/f,8%,22)
pv = -10,000,000 * 0.9259 - 60,000 * 0.8573 - 70,000 * 0.7938 - 80,000 * 0.735 - 90,000 * 0.6806 - 100,000 * 0.6302 - 110,000 * 0.5835 - 120,000 * 0.5403 - 130,000 * 0.5002 - 140,000 * 0.4632 - 150,000 * 0.4289 - 500,000 * 0.3971 - 150,000 * 0.3677 - 150,000 * 0.3405 - 150,000 * 0.3152 -150,000 * 0.2919 - 150,000 * 0.2703 - 150,000 * 0.2502 - 150,000 * 0.2317 -150,000 * 0.2145 - 150,000 * 0.1987 - 150,000 * 0.1839 + 2,000,000 * 0.1839
pv = -925,900 - 51,438 - 55,566 - 58,800 - 61,254 - 63,020 - 64,185 - 64,836 - 65,026 - 64,848 - 64,335 - 198,550 - 55,155 - 51,075 - 47,280 - 43,785 - 40,545 - 37,530 - 34,755 - 32,175 - 29,805 - 27,585 + 367,800
pv = -$1,769,648
so the present value is -$1,769,648