Economy and Environment (part of petroleum engineering group project) Essay

Economy and Environment (part of petroleum engineering group project) - Essay Example In this operation, there was both the capital expenditure (CAPEX) as well as the operating expenditure (OPEX) that will be involved in the initial years of the project, hence hindering any revenue generation in the initial years of operation. It therefore means that, the cash flow during the initial years will only consist of the CAPEX and the OPEX data before revenue generation begins. The project needed a capital injection for the first three years of operation before, hence no revenue for this period. On the fourth year, however, the project begins generating revenue. This is explained that, the project will begin producing oil on the fourth year with no or zero water at the beginning. The production will then continue after which, from the sixth year on to the ninth year, more water will be produced; hence the revenue is expected to reduce as less oil will be produced to increase the revenue. After year nine, the oil production is again expected to increase with a decrease in the production of water, hence there will be a rise in the NPV once again as oil production is expected to follow such a trend of increasing initially up to year seven where it will again be expected to decrease and again rise after year nine. This trend is demonstrated in the table below. Net Present Value is the difference between the present value of the cash inflows and the present value of the cash out flows. To calculate the Net Present Values, the project cash flows are discounted using an appropriate rate which is usually the minimum rate of the return required by the investors. The appropriate cash flows in this case are the after tax cash flows and the net cash flow is therefore estimated on an after tax basis. For this project, the appropriate discounting rate used was 7%. The various applicable rates for each year were calculated in the discounting