homework problem
Lecture 4 Example Modified
| Use this example for your HW assignment. This example differs from the lecture example. | |||||||||||
| Problem Statement | |||||||||||
| A 10" well connect has been proposed to move 30,000 Mscfd of gas to a trunk line along with a six unit equity compressor station. It is assumed that the new well connect will take approximately one year to build and revenue will not be realized until year one. The flow rate will decline by 90% during the first year of well life and 5% for the remainder of the contract. The contract term is for 10 years only. Assume Labor cost will be 40% of year one revenue for time zero and time one and 30% of the revenue of each of the following years there after. Determine the cost of service at 13% company hurdle rate? What is the NPV of this project at the company hurdle rate? What is the actual rate of return for this project assuming a cost of service to be $0.5/MMBTU? | |||||||||||
| Initial values | |||||||||||
| Initial Flow Rate = | 30000 | Mscfd | |||||||||
| Pipe Diameter = | 10 | in | Nominal Pipe | ||||||||
| Pipe Length = | 5.25 | miles | |||||||||
| Gas Heating Value = | 1100 | BTU/scf | |||||||||
| Costs and Price | |||||||||||
| Cost of Service = | $0.0500 | /MMBTU | |||||||||
| Pipe Cost = | $100,000.00 | /in-mile | |||||||||
| Six Unit Equity Compressor station = | $13,000,000 | /station | |||||||||
| Company Hurdle Rate = | 13.00% | ||||||||||
| Assume Labor cost is 30% of Revenue | |||||||||||
| Volumes | |||||||||||
| Volumes (Mscf) | 0 | 10,950,000.00 | 1,095,000.00 | 547,500.00 | 273,750.00 | 136,875.00 | 68,437.50 | 34,218.75 | 17,109.38 | 8,554.69 | 4,277.34 |
| Energy Volumes (MMBTU) | 0 | 12,045,000.00 | 1,204,500.00 | 602,250.00 | 301,125.00 | 150,562.50 | 75,281.25 | 37,640.63 | 18,820.31 | 9,410.16 | 4,705.08 |
| Cost Analysis | |||||||||||
| Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 |
| Pipeline Costs = | -$5,250,000.00 | ||||||||||
| Compression Costs = | -$13,000,000 | ||||||||||
| Labor Costs = | -$87,928,500.00 | -$87,928,500.00 | -$6,594,637.50 | -$3,297,318.75 | -$1,648,659.38 | -$824,329.69 | -$412,164.84 | -$206,082.42 | -$103,041.21 | -$51,520.61 | -$25,760.30 |
| Income = | $0.00 | $219,821,250.00 | $21,982,125.00 | $10,991,062.50 | $5,495,531.25 | $2,747,765.63 | $1,373,882.81 | $686,941.41 | $343,470.70 | $171,735.35 | $85,867.68 |
| Total Costs = | -$106,178,500.00 | -$87,928,500.00 | -$6,594,637.50 | -$3,297,318.75 | -$1,648,659.38 | -$824,329.69 | -$412,164.84 | -$206,082.42 | -$103,041.21 | -$51,520.61 | -$25,760.30 |
| Sum Total = | -$106,178,500.00 | $131,892,750.00 | $15,387,487.50 | $7,693,743.75 | $3,846,871.88 | $1,923,435.94 | $961,717.97 | $480,858.98 | $240,429.49 | $120,214.75 | $60,107.37 |
| Total Costs with 15% contingency = | -$122,105,275.00 | -$101,117,775.00 | -$7,583,833.13 | -$3,791,916.56 | -$1,895,958.28 | -$947,979.14 | -$473,989.57 | -$236,994.79 | -$118,497.39 | -$59,248.70 | -$29,624.35 |
| Sum Total with contingency = | -$122,105,275.00 | $118,703,475.00 | $14,398,291.88 | $7,199,145.94 | $3,599,572.97 | $1,799,786.48 | $899,893.24 | $449,946.62 | $224,973.31 | $112,486.66 | $56,243.33 |
| No Contingency Dollars | |||||||||||
| NPV @ 13.00% = | $32,141,370.18 | ||||||||||
| IRR = | 40.271% | ||||||||||
| Profit = | $56,429,117.63 | ||||||||||
| Payback Period ~ | 6.53 | yrs | |||||||||
| With Contingency Dollars | |||||||||||
| NPV @ 13.00% = | $3,154,058.96 | ||||||||||
| IRR = | 15.270% | ||||||||||
| Profit = | $25,338,540.42 | ||||||||||
| Payback Period ~ | 8.28 | yrs |
Volume Decline
Volume Decline 0 1 2 3 4 5 6 7 8 9 10 10950000 1095000 547500 273750 136875 68437.5 34218.75 17109.375 8554.6875 4277.34375
Years
Volume (Mscf)
HW 4 Well Data
| Cum Volume | |
| 2019 | 75,296 |
| 2020 | 114,613 |
| 2021 | 79,534 |
| 2022 | 54,812 |
| 2023 | 46,212 |
| 2024 | 46,096 |
| 2025 | 38,134 |
| 2026 | ??? |
| 2027 | ??? |
| 2028 | ??? |