The Jones Family , Incorporated - Wildcat Well NPV Analysis

INPUT PARAMETERS
6.0%

Market risk
premium

7.0%

Beta

0.80

Barrels/day

300

Probability of
dry hole

30%

Inflation/yr

2.5%

Decline in
production/yr

5.0%

Long-term
borrowing rate

7.0%

DYNAMIC CHART
NPV with End-of-Year Discounting
(Using same discount rate for Revenues and Costs)

60

INPUT
PARAMETERS
70
Instructions:

"Dynamic Chart"
shows real-time
reaction of NPV
to
changes in any
INPUT PARAMETER

80

To raise and
lower the
30
INPUT
PARAMETER
30
values,
CLICK the
up and
25 down
arrows

(except, of course,
those affecting
discount rate since
discount rate is the Xaxis)

10,000,000
8,000,000

$ of NPV

Risk free rate

6,000,000
4,000,000

* DO NOT *
"type"70values
into INPUT
PARAMETER
50
cells

Investment

5,000,000

Price/barrel

25.00

250

Shipping
cost/barrel

10.00

100

2,000,000

0
0

10

20

30

40

50

(2,000,000)

For example, to see

the influence of
increasing the
probability of a dry
hole, click repeatedly
on the UP arrow for
"Probabiltiy of dry
hole" and watch what
happens to the
Dynamic Chart.

(4,000,000)

Discount rate for all cash flows

CALCULATON OF NPV
$17,174,017

discounted at Cost of Capital

11.6%

minus
PV of FIXED
COSTS

$6,869,607

discounted at Cost of Capital

11.6%

=
PV of net annual
cash flows

$10,304,410

X
probability of oil

70%

=
weighted average
PV of net annual
cash flows

$7,213,087

PV of REVENUES

minus
Investment

$5,000,000

=
NPV of
Widlcat Well

$2,213,087

=
NPV of
Widlcat Well

$2,619,970

CLICK on arrows to change

discount rates between
Cost of Capital
(average risk)
1
and
LT borrowing rate (lower risk)
1

Use INPUT PANEL to change

Use INPUT PANEL to change

With END-of-year discounting convention

With MID-year discounting convention

CALCULATON OF CASH FLOWS

0

10

11

12

13

14

15

Use INPUT11.6%
PANEL to change
Cost of capital

Barrels/day
X 365

Barrels/year
Price/barrel

25.00

10.00

REVENUE
Shipping
cost/barrel

2,805,938

FIXED COSTS
CASH
FLOW/YEAR

109,500
25.63

(check figure)

10.25

104,025
26.27
2,732,282

98,824
26.92
2,660,559

93,883
27.60
2,590,720

10.51

10.77

11.04

1,122,375

1,092,913

1,064,224

1,036,288

1,683,563

1,639,369

1,596,336

1,554,432

89,188
28.29
2,522,713
11.31

84,729
28.99
2,456,492

80,493
29.72
2,392,009

76,468
30.46
2,329,219

72,645
31.22
2,268,077

69,012
32.00
2,208,540

65,562
32.80
2,150,566

62,284
33.62
2,094,113

59,169
34.46
2,039,143

56,211
35.32
1,985,615

53,400
36.21
1,933,493

11.60

11.89

12.18

12.49

12.80

13.12

13.45

13.79

14.13

1,009,085

982,597

956,804

931,688

907,231

883,416

860,226

837,645

815,657

794,246

14.48
773,397

1,513,628

1,473,895

1,435,205

1,397,531

1,360,846

1,325,124

1,290,339

1,256,468

1,223,486

1,191,369

1,160,096