|
|
Net Present
Value... If you want to be competitive in
OilFinancier, set up your spreadsheets for
shallow, intermediate, and
deep wells so that you can easily calculate
total present values.
Special Note: I have been making
some technical changes to OilFinancier. The examples given in this
finance section are based on the old version of OilFinancier. So if
you see the examples not matching up to the rules, it is because the
rules have changed a little. When I get the rules finalized, I will
be rewriting this entire section. Sorry for any inconvenience or
misunderstanding!
Below is a sheet that assumes that you will be the sole owner of a
deep well, which means that you will pay the entire $300,000 cost and
receive the 100% of the revenues. We have done these calculations for
50 OF Days and we have assumed a discount rate of 1% per OF Day.
|
Day |
Discount Factor |
Cash Flow |
Discounted Cash
Flow |
Cumulative |
|
1 |
1.0000 |
-300,000 |
-300,000 |
-300,000 |
|
2 |
0.9900 |
0 |
0 |
-300,000 |
|
3 |
0.9801 |
0 |
0 |
-300,000 |
|
4 |
0.9703 |
0 |
0 |
-300,000 |
|
5 |
0.9606 |
0 |
0 |
-300,000 |
|
6 |
0.9510 |
24,000 |
22,824 |
-277,176 |
|
7 |
0.9415 |
23,640 |
22,257 |
-254,920 |
|
8 |
0.9321 |
23,285 |
21,704 |
-233,216 |
|
9 |
0.9227 |
22,936 |
21,164 |
-212,052 |
|
10 |
0.9135 |
22,592 |
20,638 |
-191,414 |
|
11 |
0.9044 |
22,253 |
20,125 |
-171,288 |
|
12 |
0.8953 |
21,919 |
19,625 |
-151,663 |
|
13 |
0.8864 |
21,591 |
19,138 |
-132,525 |
|
14 |
0.8775 |
21,267 |
18,662 |
-113,863 |
|
15 |
0.8687 |
20,948 |
18,198 |
-95,665 |
|
16 |
0.8601 |
20,634 |
17,746 |
-77,919 |
|
17 |
0.8515 |
20,324 |
17,305 |
-60,614 |
|
18 |
0.8429 |
20,019 |
16,875 |
-43,739 |
|
19 |
0.8345 |
19,719 |
16,456 |
-27,283 |
|
20 |
0.8262 |
19,423 |
16,047 |
-11,237 |
|
21 |
0.8179 |
19,132 |
15,648 |
4,411 |
|
22 |
0.8097 |
18,845 |
15,259 |
19,671 |
|
23 |
0.8016 |
18,562 |
14,880 |
34,550 |
|
24 |
0.7936 |
18,284 |
14,510 |
49,061 |
|
25 |
0.7857 |
18,009 |
14,150 |
63,210 |
|
26 |
0.7778 |
17,739 |
13,798 |
77,008 |
|
27 |
0.7700 |
17,473 |
13,455 |
90,463 |
|
28 |
0.7623 |
17,211 |
13,121 |
103,584 |
|
29 |
0.7547 |
16,953 |
12,795 |
116,379 |
|
30 |
0.7472 |
16,699 |
12,477 |
128,856 |
|
31 |
0.7397 |
16,448 |
12,167 |
141,022 |
|
32 |
0.7323 |
16,201 |
11,864 |
152,887 |
|
33 |
0.7250 |
15,958 |
11,570 |
164,456 |
|
34 |
0.7177 |
15,719 |
11,282 |
175,738 |
|
35 |
0.7106 |
15,483 |
11,002 |
186,740 |
|
36 |
0.7034 |
15,251 |
10,728 |
197,468 |
|
37 |
0.6964 |
15,022 |
10,462 |
207,930 |
|
38 |
0.6894 |
14,797 |
10,202 |
218,131 |
|
39 |
0.6826 |
14,575 |
9,948 |
228,080 |
|
40 |
0.6757 |
14,356 |
9,701 |
237,781 |
|
41 |
0.6690 |
14,141 |
9,460 |
247,241 |
|
42 |
0.6623 |
13,929 |
9,225 |
256,465 |
|
43 |
0.6557 |
13,720 |
8,996 |
265,461 |
|
44 |
0.6491 |
13,514 |
8,772 |
274,233 |
|
45 |
0.6426 |
13,311 |
8,554 |
282,787 |
|
46 |
0.6362 |
13,112 |
8,342 |
291,129 |
|
47 |
0.6298 |
12,915 |
8,134 |
299,263 |
|
48 |
0.6235 |
12,721 |
7,932 |
307,195 |
|
49 |
0.6173 |
12,531 |
7,735 |
314,930 |
|
50 |
0.6111 |
12,343 |
7,543 |
322,473 |
I would like to point out the following revenue/cost facts in this
table:
- In year 1, you spent $300,000 and this shows as negative cash
flow, with a discount factor of 1.000.
- In years 2, 3, 4, and 5, your cash flows are zero. This is
the period where you are drilling the well.
- In year 6, you discover oil at the deep depth and your cash
flow starts at $24,000 per day. Your cash flow then declines at
1.5% per day.
If you are not following this logic, please use
this link to find
the details of deep wells.
I would also like to point out the following financial interpretations
you can make from this table:
- This declining cash flow is further discounted by the
discount factor.
- Your investment will pay for itself in 21 days. After this
time, all cash flow is actually profit.
- On day 50, your cumulative present value is $322,473. This is
the amount of discounted profit you have earned at this time. In
other words, you have made $322,473 more than if you had invested
your initial $300,000 in something else in the seminar that paid
1% per OF day.
- On day 50, the present value of your cash flow is $7,543,
which is about 31% of the present value of original cash flow.
For a more accurate financial analysis, you should probably
extend this spreadsheet to where the discounted cash flows are
fairly insignificant.
- This analysis is based on a discount rate of 1% per Oil
Financier day. Another discount rate will produce different
interpretations.
Let’s look at Day 50 again, and assume we want to stop the
spreadsheet calculations at this point (even though we know we should
continue). The cumulative present value of $322,473 is what is known
as the net present value (NPV), which is the number we are
looking for to make a financial decision.
The Net Present Value Calculation compares the rather large capital
investment at the start of the project to the discounted cash flows
that will accrue many years after the capital investment. If the NPV
is positive, the project is profitable. If the NPV is negative, the
investor should stay away.
The investor can also compare the NPV of two different projects. If
she has only enough money for one project, she should invest in the
project with the higher NPV. |
 |
