Page 94 - Principles of Applied Reservoir Simulation 2E

Part I: Reservoir Engineering Primer 79

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where i is the annual inflation rate, N is the number of years of the expenditure
schedule, and Q is the number of times interest is compounded each year. A
similar expression is written for revenue R:

where A/?(fc) is revenue obtained during time period k, and i is the annual interest
/
or discount rate. Equations (9.2) and (9.3) include the assumptions that i and /
are constants over the life of the project, but i and / 'are not necessarily equal.
These assumptions let us compute the present value of money expended relative
to a given inflation rate i ' and compare the result to the present value of revenue
associated with a specified interest or discount rate i.

Illustration: Application to an Oil Production Project
The net present value and break-even oil price for an oil production proj ect
can be obtained from the above analysis as an illustration of the concepts. We
specify the base year for present value calculations as the year when the project
begins. In this case, we have no initial revenue and the initial expense is just
initial investment //, thus

Afl(O) = 0 andA£(0) = // (9.4)

Substituting Eqs. (9.2) through (9.4) into Eq. (9.1) gives

Q;

Revenue from the sale of oil during period k has the form