An oil company has installed an offshore production facility for $10 million. Th
ID: 2641690 • Letter: A
Question
An oil company has installed an offshore production facility for $10 million. The annual maintenance cost of the facility is $60,000 per year for the first year, increasing by $10,000 per year for the next 9 years. In the 11th year, a major overhaul is conducted at a cost of $500,000. The overhaul has helped in keeping the maintenance cost fixed at $150,000 per year for the remaining 10 years. At the end of 20 years, the facility is sold for a sum of $2 million. If the market interest rate is 8%, calculate the present value of all the cost over the 20 years period. Also, calculate the equivalent annual cost of the facility.
Explanation / Answer
Production 1000000 year 1 2 3 4 5 6 7 8 9 10 11 12-20Y annual maintenance cost 60000 70000 80000 90000 100000 110000 120000 130000 140000 150000 650000 150000 NP @8% 1 0.925926 0.857339 0.793832 0.73503 0.680583 0.63017 0.58349 0.540269 0.500249 0.463193 2.893518 Value 60000 64814.81 68587.11 71444.9 73502.99 74864.15 75620.36 75853.75 75637.64 75037.35 301075.8 434027.7 Total NPV of out flow 1450466 less Sellin Of Facilites At 20 years (NP@8%)2000000*0.231712 463424.1 Net Out flow 987042.4 equivalent annual cost of the facility(987042/20) 49352.12