Page 361 - Advanced Mine Ventilation

336 Advanced Mine Ventilation

20.5.2 Net Present Value Method

NPV is another measure of profitability that is based on the present value of cash flows
discounted on an average rate of i in excess of the present value of investment. It is
defined by Eq. (20.4).

n
NCF x
X
NPV ¼ x (20.4)
ð1 þ iÞ
x¼0
where i is the average rate of discount; the rest of the variables have the same meaning
as defined earlier in Eq. (20.3). This method introduces the true value of money into
the analysis based on an interest rate, i, representative of the company’s reinvestment
opportunities. If the NPV is a positive value, a viable investment is indicated.
Tables 20.6 and 20.7 show the NPVs for the two methods of drilling and comple-
tion, respectively. The interest rate is assumed to be 15%.
Table 20.7 shows similar data for the horizontal wells.

20.5.3 Discounted Cash Flow Rate of Return Method
The DCFROR gives profitability in terms of a compound discount rate which can be
compared with interest rates of borrowing money or to internal rates generated by con-
current projects. It is the interest rate necessary to make the sum of the present value of
investment equal to the sum of the present values of each year’s net cash flow.
Mathematically, Eq. (20.5) defines it.

n
NCF X
X
¼ 0 (20.5)
X
x¼0 ð1 þ iÞ
The value of i that makes Eq. (20.5) valid is the DCFROR for the project.
Tables 20.8 and 20.9 show the DCFROR for the vertical well and horizontal well
options, respectively.
Most projects require a minimum DCFROR of 15%. As such, both production tech-
niques offer a good rate of return on investment. Based on the above analysis, there is
only a minor difference in the total profits using vertical or horizontal wells for gas
production.

Problem

Extend the life of the CBM wells to 30 years and calculate the revenues for both
methods of drilling using the three measures of profitability. Assume 3% production
decline per year and a price of gas at $5/MCF.