International University of Technology Twintech

Economics of the Oil & Gas Industry

BOG/7-2021
Assignment No. 5

Question one:
The cash flow profile for an investment proposal is as follows:

I= $500 S=$100

A1= $100 A2= $90 A3= $265

t= 0 1 2 5
i*=r=15%
1. Compute NPV for this project.
2. Is this project acceptable?

Question two:
The cash flow profile for an investment proposal is as follows:

I= $1200 A1= $6000 A2=$8000 A3=$10,000 A4=$9000 S=$4000

t= 0 1 2 3 4 5

i*=r=15%
1. Compute NPV.
2. Would you consider this project profitable?
Question three:
A project has an initial cost of $120,000 and an estimated salvage value
after 15 years of $70,000. Estimated average annual receipts are
$25,000. Estimated average annual disbursements are $15,000.
Assuming that annual receipts and disbursements will be uniform,
compute the prospective rate of return after taxes.

Question four:
An investment project will involve spending $200,000 at year zero and
$350,000 at year one to generate net revenues after operating costs of
$100,000 at year one and $180,000 per year at years two through eight
with zero salvage value. Use NPV, ROR and PVR to determine if this
project is economically acceptable. Assuming a project’s minimum rate of
return(i*=r) is15%.

Question five:

A man plans to purchase a home for $50,000. Property taxes are

expected to be $900 a year and insurance of $200 a year. Annual repair
and maintenance is estimated at about $400. An alternative is to rent a
house of about the same size for $400 a month (approximate the rent as
$4800 end of year payments). If 6% before taxes is the minimum
attractive rate of return on the investment in the house, what must the
resale value be 10 years hence for the equivalent annual cost of
ownership to equal the equivalent annual cost of renting?