Integrated Reservoir & Project Management (GE3115)

First Week Assignment (CC_HK201)

Dr. Nguyễn Xuân Huy

Student’s Information: Nguyễn Hán Thịnh 1652575

1 An oil company has to pay $10,000 per year, starting one year from today on a loan obtained
for five years at an effective interest rate of 8%. Calculate the equivalent present value of
these five yearly payments. The payments include both principal and interest.
(1 + ie )t − 1 1-1
Pv = Av [ ]
ie (1 + ie )t
Solution: Using the Eq. 1-1, the present value of annuity is
(1 + 0.08)5 − 1
𝑃𝑣 = $10000 [ ] = $10000(3.9927) = $39.927
0.08(1 + 0.08)5

The equal payment series present worth factor (P/A) is found at the intersection of column P/A and row t=5
as 3.9927 in the Table 1-1.
Table 1-1. 8% interest factors for annual compounding
2 An oil producer acquired production equipment by paying $10,000 as down payment and
agreed to pay the balance in four year-end installments of $10,000. Calculate the present
value of the annuity due at an interest rate of 8%. Note that the total number of payments
(including the down payment) is five.
Solution:
Step 1: According to Table 1-1 (P/A) factor for n-1 and i=8% (4 payments) is 3.3121.
Step 2: Add 1 to the P/A factor in Step 1

Step 3: Pv = $10000(4.3121) = 43.121

3 A piece of equipment is acquired for $50,000. The anticipated useful economic life of the
equipment is 10 years. Calculate the equivalent annual cost of the equipment if the market
interest rate is 8%.
Solution: Using the (A/P)i=8%, t=10 factor from Table 1-1
Av = $50000(A/P)i=8%, t=10 = $50000(0.14903) = $7451.50 per year

4 On January 1, 2002, a sum of $20,000 is deposited in a bank account paying 8% interest per
year. The money stays in the account for three years. Starting at the end of year four, the
money will be withdrawn in five equal year-end installments. How much money should be
withdrawn each year in order to have five equal year-end withdrawals?
ie (1 + ie )t 4-1
Av = Pv [ ]
(1 + ie )t − 1

Solution: Using Eq. 4-1 and Eq. 1-1 in combination

0.08(1+0.08) 5
Av = $20000 {(1 + 0.08)3 [ (1+0.08)5−1 ]}

or Av = $20000[(F/P)i=8%, t=3 x (A/P) i=8%, t=5] = $20000(1.2597)(0.2505) = $6311.1 per year starting end of
year 4

5 An oil producer plans to replace certain equipment at a cost of $100,000 five years from
today. If the interest rate is 8%, how much money must the oil producer put aside per year
in order to generate $100,000?
ie 5-1
A v = Fv [ t
]
(1 + ie ) − 1
Solution: Using Eq. 5-1, annual value is
0.08
Av = $100000 [(1+0.08)5 ]
−1
or Av = $100000(A/F)i=8%, t=5 =$100000(0.1705) = $17050 per year

6 Suppose an oil well produces 2,000 barrels per year in the first year of production. The
production declines by 200 barrels per year for each of the following five years. If the market
rate of interest is 8%, calculate the equivalent uniform annual production rate. If the price
of oil is $75 per barrel, calculate the present value of the production.
1 𝑡 6-1
A v = A1 ± 𝐺 [ − ]
𝑖𝑒 (1 + 𝑖𝑒 )𝑡 − 1
Solution: Using Eq. 6-1
1 6
Av = 2000 ± 200 [ − ]
0.08 (1 + 0.08)6 − 1
Or Av = 2000-200(A/G)i=8%, t=6 = 2000-200(2.2763) = 1544.74 barrels/year
And Av = 1544.74 x $75 = $115855.50
Using Eq. 1-1 or interest factor (P/A)i=8%, t=6
Pv = $115855.50 (P/A) i=8%, t=6 = 115855.50(4.6229) = $ 535588.39

7 An oil producer borrows $100,000 at an interest rate of 8% per year for a period of three
years. The loan has to be paid back in equal quarterly payments over the three-year period,
with the first payment due exactly three months from the date money is borrowed. Calculate
the quarterly payment and show the loan amortization schedule.
Solution: Using Eq. 4-1, the quarterly payment is
𝑖𝑛 𝑖 𝑡×4
(1+ 4𝑛)
4
Av = $100000 [ 𝑖 𝑡×4
]
(1+ 4𝑛) −1

0.02(1+0.02)12
= $100,000[ (1+0.02)12 ] = $100,000(0.09456) = $9,456 per quarter
−1

End of Querter Interest Principal Total Quarly Outstannding

Payment Payment Payment Balance
0 0 0 0 100,000.00
1 2,000 7,455.96 9,455.96 92,544.04
2 1,850.88 7,605.08 9,455.96 84,938.96
3 1,698.78 7,757.18 9,455.96 77,181.78
4 1,543.64 7,912.32 9,455.96 69,269.46
5 1,385.39 8,070.57 9,455.96 61,198.89
6 1,223.98 8,231.98 9,455.96 52,966.9
7 1,059.34 8,396.62 9,455.96 44,570.28
8 891.41 8,564.55 9,455.96 36,005.73
9 720.11 8,735.85 9,455.96 27,269.88
10 545.4 8,910.56 9,455.96 18,359.32
 11 367.19 9,088.77 9,455.96 9,270.55
12 185.41 9,270.55 9,455.96 0.00
TOTAL 13,471.52 100,000.00 113,471.52

8 An oil producer borrows $100,000 at an interest rate of 8% per year for a period of three
years. The total loan amount will be paid back at the end of the agreed three-year period,
while interest on the loan has to be paid back quarterly over the three-year period, with the
first payment due exactly three months from the date money is borrowed. Calculate the
quarterly interest payment and show the last installment at the end of year three.
8-1
Interest = (Pricipal) × (Number of Periods) × (Interest Rate per Period, fraction)

Solution: Using Eq. 8-1

Interest = Principal × Quarterly Interest Rate = $100,000 × –0.08/4 = –$2,000 per quarter
End of Querter Interest Principal Total Quarly Outstannding
Payment Payment Payment Balance
0 0 0 0 100,000
1 2,000 0 2,000 100,000
2 2,000 0 2,000 100,000
3 2,000 0 2,000 100,000
4 2,000 0 2,000 100,000
5 2,000 0 2,000 100,000
6 2,000 0 2,000 100,000
7 2,000 0 2,000 100,000
8 2,000 0 2,000 100,000
9 2,000 0 2,000 100,000
10 2,000 0 2,000 100,000
11 2,000 0 2,000 100,000
12 2,000 100,000 102,000 100,000
TOTAL 24,000 100,000 124,000

The total interest over the three years will amount to $24,000 ($2,000 × 4 quarters/year ×
3 years = $24,000). The last payment at the end of year three will be $102,000, which
will consist of the interest for the last quarter and the total borrowed amount.