Project Management in the Oil and Gas Industry

Table 2.6 Net present value calculation.
Net present value
Net cash flow
Discount rate
Year
51785.00
51785
1.0
0
18181.80
20000
0.909
1
16528.80
20000
0.826
2
0015026.20
20000
0.7513
3
13659.00
20000
0.683
4
11610.80
NPV

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48 Project Management in the Oil and Gas Industry
the rate of inflation. Its value differs from one country to another accord-
ing to a country’s nature of economics. The following equation is calculated 
using the highest rate of return and includes rate of inflation:
The nominal interest rate of return = (1 + inflation rate)
(1 + interest rate) –1.
(2.6)
The previous example includes an interest rate of ten percent and 
assumes an inflation rate of four percent. The real interest rate or discount 
rate is figured by the following equation:
 
D
1 10
1 04
1 0577
.
.
.
.
 
(2.7)
When the inflation rate is constant, the net present value is stable under 
the assumption that the rate of return is fixed. When the difference in the 
value of the interest rate changes every year, the net present value will be 
different.
2.2.3 Minimum Internal Rate of Return (MIRR) 
This method depends on calculating the value of D. Let the NPV equal 
zero so that it will be calculated by the trial and error method.
 
NPV
NCF
D
NCF
D
NCF
D
n
n
1
1
2
2
1
1
1
(
)
(
)
(
)
 
(2.8)
By knowing the NCF and that the imposition of NPV is equal to zero, 
the value of D is the project interest rate of return that the company, orga-
nization, or individual investor will achieve after implementing the project. 
–25
–50
25
50
75
100
0
5
10
15
20
25
30
35
40
Discount
rate, D
0