Project Management in the Oil and Gas Industry

Table 2.4 Sum-of-the-year-digits.
Book value at the end 
of the year
Depreciation value 
per year
Year
50000
0
36700
40000 × (5/15) = 13333
1
26000
40000 × (4/15) = 10670
2
18000
40000 × (3/15) = 8000
3
12600
40000 × (2/15) = 5330
4
10000
40000 × (1/15) = 2670
5
Table 2.5 Sinking-fund method.
Book value at the end 
of the year
Depreciation value 
per year
Year
50000
–
0
42900
7100
1
35380
7520
2
27410
7970
3
18960
8450
4
10000
8960
5

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Project Economic Analysis 47
Therefore, it is used to calculate the value of the equipment after the first 
year, as it is known that the equipment was used to drill a total depth equal 
to 30,000 meters, as shown from the following equation:
Value of the equipment = 120000 – (0.76 30000) = $97,200.
2.2.2 Method of Net Present Value (NPV)
The method of Net Present Value (NPV) is one of the most common, 
widely used methods and is one of the most important ways upon which 
the decision-making tree will be displayed later.
It is important to identify the lifetime of the project and the distribution 
of cash flow during years of the project from its beginning to the end of the 
project’s lifetime.
To calculate the equation by the current value, one must specify the 
discount rate which is given by the following equation:
NPV
NCF
D
NCF
D
NCF
D
n
n
1
1
2
2
1
1
1
(
)
(
)
(
)
,
(2.5)
where n is the number of years and D is the discount rate that is equal to 
the value of the interest rate.
The following example illustrates the NPV calculation in the suit in 
which the imposition of the discount rate is equal to ten percent.
As an example, calculating the net present value is shown in Table 2.6.
2.2.2.1 Inflation 
Rate
When assuming the interest rate or discount rate, one must not forget the 
inflation rate. The rate of inflation may be assumed as a variable every year 
or a fixed value and there are studies and economic research to calculate