15.Tyler Oil Corporation estimates the following costs to acquire, drill, and completea well on Lease A:Drilling and completion costsAcquisition costsSelling price of oil ($/bbl).Lifting costs ($/bbl).State severance tax rate$ 80,000600,0001,000255%20%Royalty interestREQUIRED: Would the investment be profitable if proved reserves are:a. 12,000 bbl?b. 18,000 bbl?c. 24,000 bbl?

Here is what we are given:Acquisition costs: $80,000Selling price of oil: $1,000 per barrelLifting…

Answered: 15. Tyler Oil Corporation estimates the…

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter10: The Basics Of Capital Budgeting: Evaluating Cash Flows

Section: Chapter Questions

Problem 19P

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4. A petroleum project involves production of crude oil from a 5,000,000 barrel reserve. Time zero mineral rights acquisition cost (lease bonus) of $2,000,000 isthe basis for cost depletion. Intangible drilling expenses of $1,500,000 will be incurred in time zero. Tangible producing equipment costing $3,000,000 at time zero will go into service in year one and be depreciated using double declining balance (on the 7-year depreciation basis considering first full year of use). Production is estimated to be 350,000 barrels per year. Well-head crude oil value before transportation cost is estimated to be $42.0o per barrel in year one, $43.00o per barrel in year two, and $44.0o per barrel in year three. Royalties are 10.0% of revenues (well-head value) each year. Operating costs are expected to be $3,000,000 in year one, $3,300,000 in year two, and $3,600,000 in year three. The allowable percentage depletion is 15.0%. The effective income tax rate is 40.0%. The investor has other taxable…
Two mutually exclusive alternatives are being considered for the environmental protection equipment at a petroleum refinery. One of these alternatives must be selected. The estimated cash flows for each alternative are as follows: Alternative A Alternative B Capital Investment Annual Expenses $20,000 $38,000 5,500 4,000 Market Value at end of useful 1,000 4,200 life Useful life 5 years 10 years Which alternative is preferred, based on the repeatability assumption? Use AW Method. a. b. Assume the study period is shortened to five years. The market value of Alternative B after five years is estimated to be $15,000. Which alternative would you recommend? Use AW method.
Mf2. Sunshine Oil & Gas is considering an investment in Perfect Lease. Given the following information, calculate the payback period (in months). Should Sunshine invest in Perfect Lease if management requires a payback period of less than 36 months? Acquisition cost of Perfect Lease $60,000 Drilling cost of one well $450,000 Estimated completion cost $600,000 Estimated selling price per bbl $55 Estimated lifting cost per bbl $20 State severance tax 6% Royalty interest 10% Estimated monthly production 750 bbls per month Payback period (in months, rounded to two decimal places): Based on payback, should Sunshine invest in Perfect Lease? (yes or no):
A mining project requires the purchase of new drilling equipment at a cost of $69750. A further $36000 will be spent on transport, installation and initial maintenance of the equipment, at the very beginning of the project. Of this amount, 35% constitutes maintenance costs and will be written off in Year 1, and the remainder will be capitalised. What is the value of the equipment for depreciation purposes? Question 4Answer a. $82350 b. $93150 c. $105750 d. $69750
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Bella Ltd wishes to invest in either project X or project Y, and has provided you with the following information. Project X Project Y Initial Investment Shs. 20,000 Shs. 30,000 Estimated Life 5 years 5 years Scrap Value Shs. 1,000 Shs. 2,000 The profits before depreciation and after taxation (cash flows) are as follows: Year 1 Year 2 Year 3 Year 4 Year 5 Project x Shs. Shs. Shs. Shs. Shs. 5,000 10,000 10,000 3,000 2,000 Project y 20,000 10,000 5,000 3,000 2,000…
An oil drilling company must choose between two mutually exclusive extraction projects, and each costs $12 million. Cash inflows include an annuity of $ 4million for the next 4 years for project A Cash inflows for project B consist of $3 million for 7 years WACC for both projects is 8%a) Estimate the cash flows and select or reject the project based on capitalbudgeting (NPV IRR and payback period )
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3. Consider a three-year project with the following information: initial fixed asset investment = $698,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $34.15; variable costs = $22.60; fixed costs = $210,500; quantity sold = 96,500 units; tax rate = 40 percent. Required: What is the OCF at the base-case quantity sold? OCF What is the OCF at 97,500 units sold? OCF How sensitive is OCF to changes in quantity sold? AOCF/AQ $ $
Best production company is evaluating the project under profitability index. Initial investment is $400,000 and net present value is $1,100,000. Profitability index of the project is: а. 2.75 b. 0.36 c. 1 d. None of the above

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