Capital Budgeting Report and Analysis

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General information

Format:                                Report and Analysis

Submission:        Submit report with CRA matrix to Assignment Minder. Note that you need to attach the Assignment Minder ‘assignment cover sheet’ to the front of the document wallet.

Submit Excel analysis file by either:

–          Submitting a USB or CD containing the Excel file with your report to Assignment Minder. If using this method, you must ensure that the USB or CD is securely attached inside the document wallet.

When saving the Excel file, please ensure that:

–          the file name includes your name and student number.

–          the file is a .xls or .xlsx file (mac files, such as .numbers are not accepted).

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Outline

Primitive Energy owns several coal seam gas reserves in south-west Queensland. As a relatively minor player in the Queensland Liquefied Natural Gas (LNG) market, Primitive does not have the capacity to transfer and process the gas for sale to international buyers. Instead, Primitive simply extracts the gas and then sells it immediately (at the well-head, which is at the surface) to one of the major gas companies operating in the area. Recently, Primitive entered into a contract to sell gas from one of its reserves for the next 12 years. The contract stipulates that the price is set at $3.50 per gigajoule in the first year and that the price will increase by 2.50% per year to adjust for inflation. 

With this contract in place, Primitive’s management are currently trying to determine the optimal well type for extracting the gas. The choice has been narrowed to two types:

A-Type Wells:     Drill 3 A-Type wells per year up to and including the beginning of the 9th year. Wells have a 4 year life. The project will operate for 12 years.

B-Type Wells:     Drill 3 B-Type wells per year up to and including the beginning of the 10th year. Wells have a 3 year life. The project will operate for 12 years.  

Primitive’s finance department conducted a preliminary discounted cash flow analysis of the wells (found in Analysis of Well Types.xlsx). Based on the annual equivalent (AE) figure for each type of well they have recommended that the B-Type well be selected because it generates the highest AE. 

A member of the management team, who studied EFB210 Finance 1, believes that the analysis is flawed (wrong) and should be re-done. They have asked that you complete the following task.

Task

Provide a detailed financial analysis that reports the net present value (NPV) that each well type generates over the full life of the project. In addition, you are to write a detailed but concise report. In completing this task, the manager has requested the following:

–            The financial analysis is to be completed in Excel. The file is to be easily adjustable for different scenarios and all inputs must be in the one sheet called ‘Assumptions’ with the analysis of each well conducted on separate sheets.

–            The report is to be short (600 words + 20% tolerance) and written in a manner that can be understood by a person with a basic understanding of financial analytical tools. It should have the following sections:

o    Summary

o    Methodology

o    Recommendations

o    Limitations

The ‘Methodology’ section must explain how the NPV was calculated over the project’s total life and must justify why this methodology is preferred over that used by the finance department.

–            In making recommendations, the analysis and report must determine at what level of variable costs do B-Type wells become equivalent to A-type wells. Note: in doing this hold the variable costs of the A-type well fixed.

In order to prepare your analysis and report, your can refer to the information provided in the Analysis of Well Types xlsx file provided. 

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