Basic Petroleum Economics Exercise

Real value Discounting Net Present Value IRR

February 2002 Nepal 1

Exercise
Year Nominal value

Inflation rate 2% Discount rate 10%

Would you invest 100US to get 20US in one year from now, 40 US in two year from now and 80 US in three year from now_

2004 2005 2006 2007

-100 20 40 80

NPV IRR
Nepal 2

February 2002

Exercise Net present value

Year Nominal value Real value Present value

2004 2005 2006 2007

NPV (10%) NPV > = 0
February 2002

-100 20 40 80

-100 19,61 38,45 75,39

-100 17,83 31,78 56,68 6,29

Go ahead with the project

Nepal 3

Exercise Net present value profile

Discount rate

NPV

0% 5% 10% 20%

-100 + 19,61 + 38,45 + 75,39 = 33,45 -100 + 18,68 + 34,88 + 65,12 = 18,68 6,29 -100 + 17,05 + 29,07 + 49,57 = -4,31

February 2002

Nepal

Exercise Net present value profile

Net present value profile
40 30 Discount rate 20 10 0 -10 NPV

Internal rate of return approximately 12,9%

February 2002 Nepal 5