Reference no: EM131912066

A petroleum project involves production of crude oil from a 5,000,000 barrel reserve Time zero mineral rights acquisition cost (lease bonus) of $2,000,000 is the basis for cost depletion (Use cost depletion analysis). Intangible drilling expenses of $1,500,000 will be incurred in time zero (Expense 100% of intangible drilling costs in time zero). Tangible producing equipment costing $3,000,000 at time zero will go into service in year one and be depreciated using double declining balance (on the 7-year depreciation basis) beginning in year one. Production is estimated to be 350,000 barrels per year. Well-head crude oil value before transportation cost is estimated to be $42.00 per barrel in year one, $43.00 per barrel in year two, and $44.00 per barrel in year three. Royalties are 10.0% of revenues (well-head value) each year. Operating costs are expected to be $3,000,000 in year one, $3,300,000 in year two, and $3,600,000 in year three. The effective income tax rate is 40.0%. No other income taxes exist against which to use deductions, so all negative taxable income will be carried forward until used against project income (stand-alone analysis). Determine the before- and after-tax cash flows for years 0, 1, 2, and 3.