I need help with question below. FULL Question uploaded. T&S


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I need help with question below. FULL Question uploaded. T&S Oil Company has $14 Million allocated to capital in 2014; they have three proposals that the engineers have brought forward. The company evaluates all projects on a 12% discount rate. The companies cost of borrowing is 5%. The forecasted economic assumptions are below: Project 1: Drilling Engineers propose drilling a new well in an existing oil field. Below are the most likely results. The company economist expects that prices will stay at $100/barrel and uses this price for the base case to evaluate all projects. The tax jurisdiction where the well will be drilled allows you to deduct all expenses from revenue and allows you to depreciate capital straight line over a 7 year period starting in the year it is placed in service (at the time of first production). The effective tax rate for production and income taxes is 60%. Project 2: The production facility has identified a new process that will cut costs on processing oil for the next 5 years by $5,000,000 per year. Below are the most likely results. The tax jurisdiction where the facility is will allow you to depreciate capital straight line over the life of the asset starting in the year it is placed in service (at the time the savings start). The effective tax rate for production and income taxes is 40%. Project 3: Explorations Engineers propose drilling a new well in a new development. The engineers give it a 25% chance of success. Same price, tax, and depreciation assumptions as Project 1. ATTACHMENT PREVIEW Download attachment 2 pages Project 2 Capital Budget-2.docx The following project is due April 22nd at the start of class. Late work will not be accepted. All answers should be typed. Include all names of group on submission. Weight will be given to thoughtful responses. Project is worth 150 pts. T&S Oil Company has $14 Million allocated to capital in 2014; they have three proposals that the engineers have brought forward. The company evaluates all projects on a 12% discount rate. The companies cost of borrowing is 5%. The forecasted economic assumptions are below: Project 1: Drilling Engineers propose drilling a new well in an existing oil field. Below are the most likely results. Year Oil Production (in thousands of barrels) Capital spend (in thousands) Cost (in thousands) 2014 0 $ 13,000 $ $ $ 2015 100.0 $ 800 $ 2016 80.0 $ 800 $ 2017 64.0 $ 800 $ 2018 51.2 $ 800 $ 2019 41.0 $ 800 $ 2020 32.8 $ 800 $ 2021 26.2 $ 800 $ 2022 21.0 $ 800 $ 2023 16.8 $ 800 $ 2024 13.4 $ 800 $ 2025 10.7 800 The company economist expects that prices will stay at $100/barrel and uses this price for the base case to evaluate all projects. The tax jurisdiction where the well will be drilled allows you to deduct all expenses from revenue and allows you to depreciate capital straight line over a 7 year period starting in the year it is placed in service (at the time of first production). The effective tax rate for production and income taxes is 60%. Project 2: The production facility has identified a new process that will cut costs on processing oil for the next 5 years by $5,000,000 per year. Below are the most likely results. Y ear Oil Production (in thousands of barrels) Capital spend (in thousands) Cost (in thousands) 2014 $ 12,000 $ $ 2015 2016 2017 2018 2019 $ $ $ $ (5,000) $ (5,000) $ (5,000) $ (5,000) $ (5,000) The tax jurisdiction where the facility is will allow you to depreciate capital straight line over the life of the asset starting in the year it is placed in service (at the time the savings start). The effective tax rate for production and income taxes is 40%. Project 3: Explorations Engineers propose drilling a new well in a new development. The engineers give it a 25% chance of success. Year Oil Production (in thousands of barrels) Capital spend (in thousands) Cost (in thousands) 2014 $ 14,000 $ $ 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 180.00 144.00 115.20 92.16 73.73 58.98 …

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