Calculate the incremental free cash flow for the well

Assignment Help Financial Management

Reference no: EM131815175

A typical oil well in the Bakken shale formation costs around $5 million to drill, and requires $500,000 in site preparation and engineering service costs prior to drilling. Assume that the revenues from the well are $1.2 million per year and operating costs are $200,000 per year. The $5 million capital cost of the well is depreciated using the straight-line method over a period of five years.

A) Calculate the incremental free cash flow for the well using the following additional assumptions:

• The corporate tax rate is 40%.

• The capital cost and engineering study costs are incurred in Year 0, and the well produces in years 1 through 5.

• In calculating net working capital, assume that accounts receivable are 10% of revenues in years 1 through 4 and 5% of revenues in year 5; and that accounts payable are 15% of costs in years 1 through 3, 10% of costs in year 4, and 30% of costs in year 5.

• Don’t forget that the engineering study costs yield a tax reduction benefit in year 0.

B) Using the incremental free cash flows from part (A), calculate the NPV and IRR of the well, assuming at 15% annual discount rate.

Reference no: EM131815175

Questions Cloud

Offer two additional considerations in capital budgeting : Imagine the producers of this video ask you to appear in the video to offer two additional considerations in capital budgeting decisions.

Analyze how would the organization identify the cost drivers : Analyze how would the organization identify the cost drivers? How would the organization use them in the implementation of this system?

Discuss what standards were applied in conducing the audit : What standards were applied in conducing the audit. Was the audit a Single audit, How do you know

Identify factors that should influence the auditor judgment : When an auditor samples for attributes, identify the factors that should influence the auditor's judgment

Calculate the incremental free cash flow for the well : Calculate the incremental free cash flow for the well using the following additional assumptions:

Compute the dividend for the current year : Compute the dividend for the current year (D0). (Round intermediate calculations and final answer to 2 decimal places, e.g. 15.20.)

Discuss the benefits of nols should be recognized : What are your thoughts as to whether the benefits of NOL's should be recognized

Calculate the price-earnings ratio : What is Roxie's Bed & Breakfast's book value per share? Calculate the market-to-book ratio. Calculate the price-earnings ratio.

Repricing trigger that maximizes the initial value : Patriot Corp. compensates executives with 10-year European call options which is granted at-the-money. If there is a signi?cant drop in the share price

User Account

All Pages