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valuation help 1 - Please address all questions under the...

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PROBLEM 3-12: ConocoPhillips Natural Gas Wellhead Project Given ConocoPhillips's Cost of Capital for project 15.00% Project life 10 years Solution Years 0 1 2 3 4 5 6 7 8 9 10 Investment $ 1,200,000 Increase in NWC 145,000 MACRS Depr Rate (7 year) 0.1429 0.2449 0.1749 0.1249 0.0893 0.0893 0.0893 0.0445 Natural Gas Wellhead Price (per MCF) $6.00 $6.00 $6.00 $6.00 $6.00 $6.00 $6.00 $6.00 $6.00 $6.00 Volume (MCF/day) 900 720 576 461 369 295 236 189 151 121 Days per year 365 365 365 365 365 365 365 365 365 365 Fee to Producer of Natural Gas $3.00 $3.00 $3.00 $3.00 $3.00 $3.00 $3.00 $3.00 $3.00 $3.00 Compression & processing costs (per MCF) 0.65 0.65 0.65 0.65 0.65 0.65 0.65 0.65 0.65 0.65 Cash Flow Calculations Natural Gas Wellhead Price Revenue $ 1,971,000 $ 1,576,800 $ 1,261,440 $ 1,009,152 $ 807,322 $ 645,857 $ 516,686 $ 413,349 $ 330,679 $ 264,543 Lease fee expense (985,500) (788,400) (630,720) (504,576) (403,661) (322,929) (258,343) (206,674) (165,339) (132,272) Compression & processing costs (213,525) (170,820) (136,656) (109,325) (87,460) (69,968) (55,974) (44,779) (35,824) (28,659) Depreciation expense (171,480) (293,880) (209,880) (149,880) (107,160) (107,160) (107,160) (53,400) - - Net operating Profit $ 600,495 $ 323,700 $ 284,184 $ 245,371 $ 209,041 $ 145,801 $ 95,209 $ 108,495 $ 129,516 $ 103,613 Less: Taxes (40%) (240,198) (129,480) (113,674) (98,148) (83,616) (58,320) (38,083) (43,398) (51,806) (41,445) Net operating profit after tax (NOPAT) $ 360,297 $ 194,220 $ 170,510 $ 147,223 $ 125,425 $ 87,480 $ 57,125 $ 65,097 $ 77,710 $ 62,168 Plus: Depreciation expense 171,480 293,880 209,880 149,880 107,160 107,160 107,160 53,400 - - Return of net working capital 145,000 Project Free Cash Flow $ (1,345,000) $ 531,777 $ 488,100 $ 380,390 $ 297,103 $ 232,585 $ 194,640 $ 164,285 $ 118,497 $ 77,710 $ 207,168 Part a: What are the NPV and IRR for the proposed project, based on the forecasts make above? NPV $ 280,051.21 IRR 22.43% Should Chris recommend that the project be undertaken? Recommendation (yes or no) Yes Explain yhour answer. What reservations, if any, should Chris have about recommending the project to his boss? Chris should recommend the project based on the above results, because the NPV is positive, and the IRR exceeds the 15.00%. Current Value Best Case Most Likely Worst Case Natural Gas Price $6.00 $8.00 $6.00 $3.00 Production Rate 900 1,200 900 700 NPV $280,051.21 $1,440,400 $280,051 $645,791.50 IRR 22.43% 53.11% 22.43% -2.34% c. Do breakeven Sensitivity Analsyis to find each of the following a. Breakeven nautral gas price for an NPV = 0 $4.98 b. 704.00 c. Breakeven investment for an NPV = 0 $1,573,795.00 d. Given the results of your risk analysis in parts b and c, would you recommend this project? Recommendation (yes or no) Yes. Explain your answer. Please address all questions under the mini-case on page 89-91 of the textbook. Provide your answers in the space provided below. This is an individual work and any type of collabration among students will result a "F" grade for the course for both party involved. Please submit your completed Excel worksheet to dropbox by deadline. No late submission will be accetpted.
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