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There is a lot more to this subject than is covered here in one blog post. Essentially this is what I think the petroleum engineer as an analyst needs to know. It is far from the level of understanding needed to calculate WACC and many of its applications. Conceptual Framework Several concepts of financial theory […]

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Present Value Ratio (PVR) While NPV fails to deliver a measure of capital efficiency, the Present Value Ratio (PVR) index calculates a measure of investment efficiency that is very useful in ranking projects with significant capital investment. It is the ratio of the discounted (after tax) net cash generated by a project to the discounted […]

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After a long hiatus we are now returning to the series on oilfield economics. Discounted cash flow return on investment (DCFROI) also referred to as discounted cash flow rate-of-return (DCFROR) or Internal Rate of Return (IRR) is defined as the discount rate at which the NPV is zero. It is very attractive to decision makers […]

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Price Escalation and Constant Price Cases Changing product prices for oil and gas are a fact that is now ingrained in the thought processes of evaluators. Price forecasting can be based on many approaches ranging from fundamental supply and demand predictions through trend analysis. No method has a stellar track record over a significant time […]

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Discounting Monthly Cash Flows One method of discounting monthly cash flows is to use the number of years (a non-integer) corresponding to those months and use the annual discount factor[1]. Another alternative is to use a monthly discount rate and to use the integer months for the calculation. In this latter example, there are two […]

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Discounting of future cash flows, time value of money It is commonly said that money has a time value. This is self-evident. Would you prefer to have $1,000 paid to you annually for the next thirty years or to receive $30,000 today?  While there may be certain circumstances where the delayed payments are preferable,[1] it […]

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