The company drilling this well is a non-integrated company that is currently pro
ID: 2511925 • Letter: T
Question
The company drilling this well is a non-integrated company that is currently
producing more than 1,000 bbls/day of other production. Assume the company has
had other income against which to utilize all deductions when incurred (expense
scenario, NO LOSS FORWARD) and this will continue to be the case point forward.
The property was acquired two years ago for a lease bonus of $1,500,000 and the
company spent $2,550,000 last year (year -1) on intangible drilling costs that took
the well to the point of completion. At that point, the company made the decision to
delay completing the well. For all of the data above assume the company will take
(or took in the case of sunk costs) all qualified deductions beginning in the year the
costs are incurred, with a half-year convention for the amortization of the geological
and geophysical cost. For the tangible completion costs assume you will use 7-Year
MACRS instead of bonus depreciation. Well reserves are estimated at 900,000 bbls
and have been categorized as a proven resource. Use a 25% combined state and
federal tax rate for ALL years of the model. Calculate the after-tax cash flows (ATCF)
for the sunk cost periods -2 and -1 along with the point forward ATCF for time zero
and years 1 and 2. Time period -2 and -1 are sunk costs, and should not be used in
economics except for remaining tax deductions that will impact the time zero and
years 1 and 2 ATCF. No economics are requested, the problem allows you to
practice computing the appropriate ATCF only.
Explanation / Answer
Cash Flow After tax= Net Income + Depreciation + Amortization + Other Cash Charges
where;
net income= 15,00,000
depreciation = 15,00,000/7=214285.7
amlortization = half of net income i.e 15,00,000/2=7,50,000
other cash charges= 2,550,000 + 1,500,000= 4,050,000
so, as per formula
BTCF= 65,14,285.7 and ATCF would be its 25% ( 65,14,285.7 *25/100=16,28,571.4)
ATCF= 16,28,571.4