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3.0 Petr. Ec. - Lect No. 03 - 3rd STG - DPETE (2 SPP) PDF
3.0 Petr. Ec. - Lect No. 03 - 3rd STG - DPETE (2 SPP) PDF
Koya University
Faculty of Engineering
Department of Petroleum Engineering
Third Stage
Petroleum Economics
Measures of Profitability and Performance
of Projects
Farhad Abdulrahman
Assistant Lecturer
© Farhad Khoshnaw 1
29/02/2016
Payout (PO)
• The length of time which elapses until the account
balance is exactly zero is called payout time.
• Strengths:
– Simple
– Measures an impact on liquidity
• Weaknesses:
1. Payout considers cashflows only up to the point of
payback.
2. Especially troublesome with large abandonment
costs
3. Project profits cannot be weighted: (n x average ≠
total)
© Farhad Khoshnaw 2
29/02/2016
Example 1.0
Consider the project (Name P in Table 1.0) with greatly
differing after tax cash flow patterns where each project
requires only one investment to be made at time zero.
Using the following information:
A. Project life span is 10 years
B. Profit indicators like
i. payout period
ii. discounted cash flow rate of return
iii. net present value (NPV) at 5%, 10% and 15%
Calculate:
1. POP, DCFROR & NPV
2. The future value of project at 10 % discount rate for ten years
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© Farhad Khoshnaw 3
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© Farhad Khoshnaw 4
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CC𝐹n 100
=n+ =2+
FCn+1 300
= 2. 33 Years
© Farhad Khoshnaw 5
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∴ NPVi=0% = $650
© Farhad Khoshnaw 6
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DR (%) 0 5 10 15 20 25 30
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© Farhad Khoshnaw 8
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&
𝑛
1
𝑁𝑃𝑉 𝐶𝐹 ∗
(1 + 𝑖)𝑗
𝑗=0
Where;
CF = Cash Flow
i = Interest Rate (5%, 10% and 15%)
j = Discounted period (1, 2, 3…….10)
Project P
PROJECT - P
YEAR
CF DF @ 5% CF X DF DF @ 10% CF X DF DF @ 15% CF X DF
S
0 -1000 1 -1000 1 -1000 1 -1000
1 500 0.9524 476.1905 0.9091 454.5455 0.8696 434.7826
2 400 0.9070 362.8118 0.8264 330.5785 0.7561 302.4575
3 300 0.8638 259.1513 0.7513 225.3944 0.6575 197.2549
4 200 0.8227 164.5405 0.6830 136.6027 0.5718 114.3506
5 100 0.7835 78.3526 0.6209 62.0921 0.4972 49.7177
6 50 0.7462 37.3108 0.5645 28.2237 0.4323 21.6164
7 40 0.7107 28.4273 0.5132 20.5263 0.3759 15.0375
8 30 0.6768 20.3052 0.4665 13.9952 0.3269 9.8071
9 20 0.6446 12.8922 0.4241 8.4820 0.2843 5.6852
10 10 0.6139 6.1391 0.3855 3.8554 0.2472 2.4718
NPV 446.1212 284.2959 153.1813
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© Farhad Khoshnaw 9
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−𝐧
𝐍𝐏𝐕 = 𝐅𝐕 𝟏 + 𝐫
Where
FV= Net Future Value,
NPV= Net Present Value
r = Interest rate per period
n = Number of years (Project Period)
FV for Project, P
n
→ FV = NPVi=10% × 1 + r
= $737.4
© Farhad Khoshnaw 10
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HOME WORK
1. Do the same
calculation for the
projects X & Y.
End
© Farhad Khoshnaw 11