An engineer has generated an oil production forecast for a group of wells. Accor
ID: 2638642 • Letter: A
Question
An engineer has generated an oil production forecast for a group of wells. According to this forecast, the wells produce 30,000 barrels in the first year. Starting the second year, production declines by 2,000 barrels per year for 4 years. Starting the sixth year, production declines by 3,000 barrels per year for another 4 years. Calculate the present value of the revenues if the oil price is $15 per barrel for the first 5 years and $16 per barrel thereafter. Also, calculate the equivalent annual value of these revenues. Assume interest rate of 8%.
Explanation / Answer
Ans.
Equivalent annual cost = (Interest Rate* NPV )
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[ 1
Year Production(in barrels) Price per barrel($) Revenue Present value of revenue 1 30,000 15 4,50,000 450000 2 28,000 15 4,20,000 388889 3 26,000 15 3,90,000 334362 4 24,000 15 3,60,000 285780 5 22,000 15 3,30,000 242560 6 19,000 16 3,04,000 206897 7 16,000 16 2,56,000 161323 8 13,000 16 2,08,000 121366 9 10,000 16 1,60,000 86443 10 7,000 16 1,12,000 56028 NPV 2333648 Interest Rate 8%