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

Reviews

Write a Review

Financial Management Questions & Answers

  Foreign company acquisition

Acquisition by a foreign company and the effects of that decision and the results of foreign exchange in Euro and the exchange rate differences.

  Financial management for profit and non profit organizations

In this essay, we are going to discuss the issues of financial management in a non-profit organisation.

  Method for estimating a venture''s value

Evaluate venture's present value, cash and surplus cash and basic venture capital.

  Replacement analysis

This document show the Replacement Analysis of modling machine. Is replacement give profit to company or not?

  Business finance task - capital budgeting

Your company is considering using the payback period for capital-budgeting. Discuss the advantages and disadvantages of this technique.

  Analysis of the investment

In this project, you will focus on one of these: the additional cost resulting from the purchase of an apple press (a piece of equipment required to manufacture apple juice).

  Conduct a what-if analysis

Review the readings and media for this unit, including the Anthony's Orchard case study media. Familiarise yourself with the Anthony's Orchard company and its current situation.

  Determine operational expenditures

Organisations' behaviour is guided by financial data. In the short term, such data will help determine operational expenditures; in the long term, historical data may help generate forecasts aimed at determining strategic plans. In both instances.

  Personal financial management

How much will you have left over each half year if you adopt the latter course of action?

  Sources of finance for expansion into new foreign markets

A quoted company is considering several long-term sources of finance for expansion into new foreign markets.

  Long term financial planning

This assignment is designed for analyze Long term financial planning begins with the sales forecast and the key input in the long term fincial planning.

  Explain the role of fincial manager

This assignment explain the role of fincial manager, function of manger. And what are the motives of financial manager.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd