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1 ENERGY INC. Investment Project Analysis Fisoye Delano © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 2 Background of Fisoye Delano • Master, Petroleum Engineering. University of Houston • Master, Business Administration. (MBA) University of Lagos • Bachelor, Petroleum Engineering. University of Ibadan • 1978 • 1981 • 2000 Joined Shell as a Wellsite Petroleum Engineer Joined Texaco. Worked in Nigeria, Trinidad and Tobago, United States. Senior Researcher, Institute for Energy, Law & Enterprise Member, Society of Petroleum Engineers (SPE), Member, International Association for Energy Economics (IAEE) Contact: Delan00@aol.com © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 3 Outline • Time value of money • Economic analysis concepts • Economic Measures • Cashflow model © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 4 Investment Project Analysis • Applicable to all capital projects regardless of the dollar value • Provides effective and consistent evaluation of investment opportunities • Determines the most financially attractive projects • Critical to financial decision-making © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 5 Investment Project Analysis • The focus is on capital investment analysis • Also used in: – Asset valuation – Strategic and Tactical Plan – Asset sales – Opportunities for improvements © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 6 Investment Project Analysis • The results of this evaluation process are dependent upon the validity and reliability of the assumptions used in the analysis. • Therefore, it is critical that the assumptions be carefully and realistically formulated. © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 7 Other Considerations For Financial Decision Making • Strategic implication of project • Environmental implication • Enhancement of the company’s reputation © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. Investment Project Analysis Concepts Time Value of Money 8 Present value theory. This concept states that a dollar today is worth more than a dollar tomorrow since the dollar can be invested to earn money in the interim period. •Future dollars in cash flow schedules are therefore discounted. •The higher the discount rate, the less the future dollar is worth today. © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 9 © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. Investment Project Analysis Concepts 11 © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 12 Economic Analysis Concepts All project economic analysis should be performed based on the following concepts: Net cash flow to energy inc. The cash flow from investment proposals must be analyzed on a comparable basis in order to determine which proposals have the greatest economic value to Energy Inc. Therefore all investments should be evaluated on the basis of after-tax U.S. Dollar cash flow to Energy Inc. A project's cash flow should include all foreign tax effects, such as income and remittance taxes, and any U.S. Income tax effects. Weighted average cost of capital (WACC) This is the rate used to discount future project net cash flow. The cost of capital is the weighted average after-tax cost of debt, preferred and common stock in Energy Inc.‘s capital structure. The WACC is calculated by the finance department and issued by the comptroller. © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 13 Economic Analysis Concepts Current dollar basis. All cash flow should be stated in current (nominal) dollars (i.e. actual amounts which are expected to be expended or received each year). Current dollar forecasts represent changes due to inflation and any real price change above or below inflation. The rates used should be consistent with the most recent forecast provided by corporate. Foreign currency exchange rates. Forecasted cash flows based on local currencies should be converted into U.S. Dollars using current currency exchange rates. © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 14 Economic Analysis Concepts Full cycle or full life economics. • Economic value of an asset that was acquired in the past and had its value enhanced through additional investments. • Results do not represent the current economic value to the firm since the analysis includes prior investment, revenue and expenses. • Results include the benefit of hindsight and are useful to improve decisions made in the future. © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 15 Economic Measures The following four measures are commonly used in project analysis. Each one provides important information on the attractiveness of a project. • Net Present Value (NPV) • Present Worth Payout (PWP) • Discounted Cash Flow Return on Investment (DCFROI or IRR) • Present Worth Index (PWI) © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 16 Economic Measures Net Present Value (NPV) The net present value is the economic value expected to be generated by the project at the time of measurement. It represents the value being added to the Company by making the investment. Decision Rule – NPV>0 Limitations – A larger investment will normally have a larger present value. A ranking based simply on net present value would therefore tend to favor large investments over small investments. – Does not consider length of time to achieve that value. © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 17 Economic Measures Present worth index (PWI) PWI measures the relative attractiveness of projects per dollar of investment. The ratio of the present value of cash inflows to the present value of the cash outflows. Designed to address the limitation of NPV cited above . Limitations. – It is not a good indicator of the significance of a project. – Is dependent on cost of capital used. If cost of capital is over or underestimated could result in selection of wrong project. © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 18 Economic Measures Present worth payout (PWP) payout measures the time that the net investment will be at risk. The longer the payout period, the more chance for some unfavorable circumstance to occur. Limitation: – Disregards cash flows received after the payout period. It does not directly measure the value created by the project. – Is dependent on cost of capital used. © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 19 Economic Measures Discounted cash flow return on investment (DCFROI/IRR). Measures the efficiency of the project in producing value without reference to any predetermined cost of capital. The discount rate which equates the project's discounted net cash inflows with its discounted net cash outflows. Decision rule – IRR>Cost of capital. Limitation: – Favors projects with a quick payout or short-term in nature. © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 20 © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 22 Summary of Economic Measures © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 23 Economic Measures Therefore, it is important to use all the four economic measures (NPV, PWI, IRR and PWP) for investment project analysis. © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. Investment Project Analysis Concepts 24 © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 25 Fiscal Model Contracts • Concession Contract • Participation Joint Venture Agreement • Production Sharing Agreement • Service Contracts © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 26 Fiscal Model Royalties & taxes • Royalties & tariffs • Federal income tax • State and local taxes – Severance tax – Ad Volorem tax • Foreign tax credit • Investment tax credit • Wind fall tax © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 27 Fiscal Model Depreciation, depletion & amortization (DD&A). Recovery of the cost of a fixed asset by allocating the cost over the estimated life of the asset. • Methods. – – – – – Straight-line decline (SLD). Sum-of-the-year’s digit (SYD). Declining balance (DB). Double declining balance (DDB). Unit of production. (UOP) Restoration and abandonment, Salvage value. © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. Investment Project Analysis Concepts 28 © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 29 Input Elements Costs • Capital cost estimate • Operating cost estimate over the life of the project Revenue • Production forecast • Price forecast © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 30 Input Elements Capital expenditure Cash expenditures required to obtain the forecast benefits of a project, e.g., Acquisition of property, plant, and equipment, development costs, construction costs, For example oil & gas development Geoscientists and engineers define and plan and cost out the optimum way to exploit the asset. – Number of wells to be drilled – Size of processing facilities – Pipelines facilities to bring the products to point of sale © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 31 Input Elements Operating expenses • Fixed operating expenses - expenses directly attributable to the project's operations but unrelated to the level of activity, e.g., Maintenance, manpower, etc. • Variable operating expenses - expenses directly attributable to the activity level of the project's operations, e.g., Fuel, power, feedstock cost, etc. • Overhead expenses - increases or decreases in expenses in administrative functions which are indirectly attributable to the project, e.g., Research and development, accounting, computer © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 32 Input Elements Production forecast. For example for an oil and gas prospect a multidisciplinary asset development team made up of geoscientists and engineers predict: • Recoverable reserves. • Reservoir performance. • Optimum economic method of development. • Production profile. • Time schedule for future investments. © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 33 Input Elements Price forecast. In today’s era of price volatility, future price forecast are now as important if not more important than other engineering analysis in producing sound evaluation of projects. To ensure consistency in project economic analysis prices used in the analysis should be based on prices provided by corporate in its periodic long term price forecast letter or other specific forecasts approved by corporate. © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 34 Crude Oil Price Forecast Source: http://www.oilnergy.com © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 35 Major Events and World Oil Prices 1970-2004 © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 36 Crude Oil Price Forecast West Texas Intermediate Crude Oil Price (Base Case and 95% Confidence Interval*) Crude Oil Future s Short-Term Energy Outlook, February 2005 *The confidence intervals show +/- 2 standard errors based on the properties of the model. The ranges do not include the effects of major supply disruptions. © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 37 Natural Gas Price Forecast Source: http://www.oilnergy.com © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 38 Natural Gas Price Forecast Figure 8. U.S. Natural Gas Spot Prices (Base Case and 95% Confidence Interval*) Natural Gas Futures Sources: Short-Term Energy Outlook, February 2005 *The confidence intervals show +/- 2 standard errors based on the properties of the model. The ranges do not include the effects of major supply disruptions. © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 39 Input Elements • Analysis is based on estimating the expected timing and amount of a project's cash flow elements • Because it is developed from estimates, contain uncertainties. The uncertainties should be quantified through the use of sensitivity analysis. © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 40 Cashflow Model Production Sharing Agreement Cost recovery Profit split Bonuses Signature Bonus Production bonus Term – – – – Exploratory Period Production Period Extension Termination Most of these may be negotiable Exclusion of Areas (Relinquish Area schedule) Minimum Work Program © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 41 © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 43 Sensitivity analysis • Sensitivity analysis indicates the effect of a change in the magnitude or timing of individual cash flow elements. – – – – – – Sales demand Prices Investment amount and timing. Operating costs. Crude and gas production. Tax rate or other government take. • A "High" and "Low" case could be included as sensitivity. • Probabilistic Risk Economics is also a type of sensitivity analysis that may be conducted. © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 44 Principal Factors Impacting the Economics IMPACT OF VARIABLES ON ORIGINAL NPV % Change Total Sales Volume (GSC) Contractor Share (PSC) Inflation Price (GSC) Start-Up Delay CAPEX Production Profile (GSC & PSC) OPEX -30% -20% -10% 0% 10% 20% 30% 40% © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 45 ENERGY INC. Case Study Opuamah Field Post Expenditure Review Energy Inc. Lardistan This case study illustrates how various aspects of project economics impact decision making © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 46 Post Expenditure Review • The Post-Expenditure Review process monitors the overall effectiveness of capital investment program. After sufficient operational results are available, the actual economic performance of a project is compared with the original estimate, made at the time the appropriation was submitted. • The objective of a post expenditure review is to determine the cause of differences between actual and projected performance and apply the knowledge gained to future investment evaluations. A greater understanding of the reasons for success or failure should result in improved investment evaluations and, consequently, better decisions. • Energy Inc’s Projects Requiring Review: Project Gross Cost exceeds $10 million. © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. Project Description Opuamah Field 47 Nov. 1974 Energy Inc. signed PSC 1976 Opuamah` Opuamah Gas Field Discovered, water depth 500’ 1980 Four appraisal wells drilled to define 6 stacked Pleistocene sandstone reservoir. 1981 Field declared commercial after 10 DSTs tested dry gas. 1992 Obtained appropriation approval to develop Opuamah Field Sept. 1993 Renegotiated PSC, extended contract term. 1995 Drilled 5th appraisal well. Installed drilling and production platform and 32 miles 24” pipeline. © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 48 Project Description Opuamah Field Development • Production started Mar. 1996 • 8 Producing Wells • Wells capacity of 425 mmscfpd • Facilities limit 325 mmscfpd • 2nd phase development drilling of 6 wells in 20022003 • Compression required by 2006 © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 49 COMPARISON OF ORIGINAL & CURRENT ECONOMICS Original approval 1992, Appropriation approval to develop Opuamah Field granted. • Cost to cover – 7 development wells – Installation of platform and pipelines – Additional seven wells to be drilled in 1998 and 2007 – Compression facilities – Abandonment expenses Actual • 9 wells were drilled The NPV calculated for the current economics is 7.2% higher than for the original economics. © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 50 Principal Factors Impacting the Economics Original Economics Changes due to: Total Sales Volume (GSC) Inflation CAPEX Production Profile (GSC & PSC) OPEX Start-Up Delay Price (GSC) Contractor Share (PSC) Current Economics 63.70 21.00 10.00 3.00 2.05 (2.85) (4.80) (9.85) (13.95) 33.0% 15.7% 4.7% 3.2% -4.5% -7.5% -15.5% -21.9% 68.30 7.2% © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 51 Principal Factors Impacting the Economics Renegotiated Production Sharing Contract • The 1974 PSC was being renegotiated by the partners at the time when the original request for approval was prepared. • The amended PSC provided for a favorable share to the contractor for the first 115 BSCF to assist in early recovery of costs. • Significant effect on the project NPV, reducing it by 21% despite the early-life cost recovery provision negotiated. Reduction due to the lower contractor share during the balance of the project. Rate [mmscfd] Original Assumed Amended Cumulative Production Production Production Production Sharing Sharing Sharing [bscf] Contract Contract Contract 600 115 40% 35% 30% 25% 20% 60% 55% 50% 45% 40% 50% 45% 40% 35% 30% © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 52 CONTRACT SUMMARY Energy Inc. (50%) PSC till 2021 + extension Production Split changed in Jul. 1998 Production Splits Operator Govt. First 115 BCF 85% 15% 0 - 150 mmscfpd 50% 50% 151 - 300 mmscfpd 45% 55% 301 - 450 mmscfpd 40% 60% Govt. share settles all taxes and royalties. © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 53 Principal Factors Impacting the Economics Gas Sales Contract Two major factors with opposite effects on the economics. • Contract volumes start at 87 MMCFD in 1996, increasing to 275 MMCFD in 2003 and returning to 250 MMCFD from 2009 onward. • Fixed Price of $0.91 USD per MMBTU (escalated 4% per year from 1993). 1998 price is $1.1194/MMBTU. Item 1992 Gas Price [US$/mscf] Annual Escalator [% pa] Initial Rate Maximum Rate Max. Rate Year Total Volume [mmscfd] [mmscfd] [bscf] Estimated Gas Sales Contract 0.9590 4 150 200 8 1,295 Actual Gas Sales Better Contract (Worse) 0.9053 (0.0537) 4 87 275 8 1,720 Current Opuamah Field Gas Sales Agreement • Contract w/ National Gas Company (NGC) for 20 years (1996 to 2015) • Gas is sold on a take or pay basis • Gas in excess of minimum daily © 2005 by Institute for Energy, Law & Enterprise, requirement University soldofatHouston 20% discount Law Center. reserved. (63) 75 425 All rights 54 Principal Factors Impacting the Economics Gas Sales Contract Two major factors with opposite effects on the economics. • The effect of the lower price reduced the NPV by 15.5%. • The higher sales volumes resulted in an increase in NPV of 33% even though the sales volumes were lower than projected for the earlier years of the project. © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 55 2001 Production Performance NGC in Pay position for 2000. MMCFPD Higher demand from NGC in 2001. © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 56 MMCFPD Production Profile © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 57 Energy Inc. Booked Reserves BCF MMBOE Proved 330 55 Probable 140 23 Possible 480 80 Total 950 158 @ Dec 31, 2001 © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. Principal Factors Impacting the Economics 58 Capital Expenditure The original estimate - the first seven development wells, of which one was expected to be dry. Drilled eight development wells, all of which were brought on production, and one appraisal well. Actual facilities costs were only 4% higher than the estimate in the original economics. Capex Item No. Wells Platform Pipeline G&G Appraisal Well Development Wells Original Current Economics Economics mmUS$, mmUS$, Percent 100% 100% Change 7 40.104 33.950 2.500 40.460 9 41.221 35.901 12.902 42.888 29% 3% 6% -100% 100% 6% © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 59 Principal Factors Impacting the Economics Capital Expenditure Current view: Reduced future costs, resulting in an overall improvement in NPV by 4.7%. – No additional drilling in 1998 – 2nd phase drilling 2001 – Existing wells performing better than expected. © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 60 Operating Matrics NPV @ 1/1/01 ($MM) - $160mm © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 61 2001 Performance © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 62 Principal Factors Impacting the Economics Operating Expenses • • • The original economics only included direct operating costs which have actually been lower on average during the first three years of the project. Current projections track the original estimates quite closely in the middle and later years of the project, while R&A costs are now projected to be lower. Operating expenses has resulted in a reduction of the NPV by 4.5%. Opex Item (Avg, 1st 3 yrs) Direct OPEX Overheads Indir. Overheads Others Insurance etc. Total Original Current Economics Economic mmUS$, s mmUS$, Percent 50% WI 50% WI Change 1.600 0 0 0 0 1.600 1.408 0.969 0.676 0.110 0.329 3.493 -12% 100% 100% 100% 100% 118% © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 63 Principal Factors Impacting the Economics Inflation & Delay Inflation. Start-up Delay • First gas was achieved 11 • Original economics used months later than the 1992 corporate originally projected estimates of future thereby delaying the domestic U.S. Inflation project cash flow and rates which averaged reducing the NPV by 7.5%. nearly 4% over the life of the project. • Current corporate estimates are in the range of 1.7% to 3%, and this has raised the NPV by 16%. © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 64 Principal Factors Impacting the Economics © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 65 Principal Factors Impacting the Economics IMPACT OF VARIABLES ON ORIGINAL NPV % Change Total Sales Volume (GSC) Contractor Share (PSC) Inflation Price (GSC) Start-Up Delay CAPEX Production Profile (GSC & PSC) OPEX -30% -20% -10% 0% 10% 20% 30% 40% © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 66 Conclusions The project economics were most significantly impacted by factors that control the revenue streams – price, sales volume and production splits and also by the inflation rate– rather than operational issues such as CAPEX, OPEX or Start-Up Delays. © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 67 Conclusions The current economics shows that the Opuamah Gas Field Development Project has maintained its position as an attractive investment for Energy Inc. despite the negative impact on revenues. © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. 68 ENERGY INC. Investment Project Analysis Fisoye Delano © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center. All rights reserved. [...]... rights reserved 23 Economic Measures Therefore, it is important to use all the four economic measures (NPV, PWI, IRR and PWP) for investment project analysis © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center All rights reserved Investment Project Analysis Concepts 24 © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center All rights reserved 25... future investments © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center All rights reserved 33 Input Elements Price forecast In today’s era of price volatility, future price forecast are now as important if not more important than other engineering analysis in producing sound evaluation of projects To ensure consistency in project economic analysis prices used in the analysis. ..12 Economic Analysis Concepts All project economic analysis should be performed based on the following concepts: Net cash flow to energy inc The cash flow from investment proposals must be analyzed on a comparable basis in order to determine which proposals have the greatest economic value to Energy Inc Therefore all investments should be evaluated on the basis of... economic value expected to be generated by the project at the time of measurement It represents the value being added to the Company by making the investment Decision Rule – NPV>0 Limitations – A larger investment will normally have a larger present value A ranking based simply on net present value would therefore tend to favor large investments over small investments – Does not consider length of time... attractiveness of projects per dollar of investment The ratio of the present value of cash inflows to the present value of the cash outflows Designed to address the limitation of NPV cited above Limitations – It is not a good indicator of the significance of a project – Is dependent on cost of capital used If cost of capital is over or underestimated could result in selection of wrong project © 2005... Economic Measures Discounted cash flow return on investment (DCFROI/IRR) Measures the efficiency of the project in producing value without reference to any predetermined cost of capital The discount rate which equates the project' s discounted net cash inflows with its discounted net cash outflows Decision rule – IRR>Cost of capital Limitation: – Favors projects with a quick payout or short-term in nature... Houston Law Center All rights reserved 15 Economic Measures The following four measures are commonly used in project analysis Each one provides important information on the attractiveness of a project • Net Present Value (NPV) • Present Worth Payout (PWP) • Discounted Cash Flow Return on Investment (DCFROI or IRR) • Present Worth Index (PWI) © 2005 by Institute for Energy, Law & Enterprise, University... for Energy, Law & Enterprise, University of Houston Law Center All rights reserved Investment Project Analysis Concepts 28 © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center All rights reserved 29 Input Elements Costs • Capital cost estimate • Operating cost estimate over the life of the project Revenue • Production forecast • Price forecast © 2005 by Institute for Energy,... University of Houston Law Center All rights reserved 14 Economic Analysis Concepts Full cycle or full life economics • Economic value of an asset that was acquired in the past and had its value enhanced through additional investments • Results do not represent the current economic value to the firm since the analysis includes prior investment, revenue and expenses • Results include the benefit of... attributable to the project' s operations but unrelated to the level of activity, e.g., Maintenance, manpower, etc • Variable operating expenses - expenses directly attributable to the activity level of the project' s operations, e.g., Fuel, power, feedstock cost, etc • Overhead expenses - increases or decreases in expenses in administrative functions which are indirectly attributable to the project, e.g., ... PWI, IRR and PWP) for investment project analysis © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center All rights reserved Investment Project Analysis Concepts 24... reserved Investment Project Analysis Concepts 11 © 2005 by Institute for Energy, Law & Enterprise, University of Houston Law Center All rights reserved 12 Economic Analysis Concepts All project. .. Enterprise, University of Houston Law Center All rights reserved 5 Investment Project Analysis • The focus is on capital investment analysis • Also used in: – Asset valuation – Strategic and Tactical