Question

Chevron currently operates an oil exploration project with Saudi Aramco Company. The project will run for the next 20 years with an initial investment of $0.75M and annual operating cost of $65000/yr for the next 7 years, and also $80,000/yr for the next 8 years. The annual operating cost for the last five year is estimated as $95000/yr with a gradient increment of $1000. A complete overhaul of the fracking equipment will be conducted at the end of year 5 and 14 at an extra cost of $65400 and 85200 respectively. The equipment used will be dispose of at an estimated salvage value of $350000. Considering an interest rate of 10% per year: a) Determine the engineering economy symbols and their value for each option. b) Construct the Cash flow diagram c) Calculate the Present Worth of the Cash flow Estimates

Answer 1

In this question, the sign conventions used has the expenses as negative costs and the profits/salvage value as positive costs.

All the costs are calculated in present time using the basic formulas of conversion . The formulae used are mentioned at the end.

Given the initial investment = $0.75 m Annual operating cost : $ 65,000 / yr I first 7 years) $80,000 lys (8-15 years) - $95,000/yr lleth year and after that a graclient increment en el cor every year till 20th yea 20 year One haul (at end of 5 years) = $65400 " (uun14a $ 85200 salvage nature ,Vs = $3,50,000 Interest Rate, is loy per year i) The engineering economy symbols are :- 1. a) P= Present value of money . 1. b) fa Puture value of money. 1. c) R = secies of consecutive, equel amounts end-of- peied of money d) n = no. of years = 20 - e i= interest rate per year (in fraction ) = oil Years -> 1 2 3 $ 359,000 6 7 8 9 10 11 12 13 14 15 16 17 18 19 $65400 Coverhad $85000/oferhaul) $ 0.75m (inital investrerit) $s ( operating ) Costs 1) $80,000 --> $ 65,000 $95.00 (opecutane (perc Present value of one hauls One haul at end 7 5th year: 51 = $65400 Present relee, PE Present nakue Pi = Su = -65400 - --$40608.25 01-15 one haut at end of 14th year $ $ 85200 Resent value; B = - - $ 48435.8

UNI Present nalue of operating costs for first 7 years P: 265000 (10-1) (01) (1.1)* P -$ 3,16,447.2 value of operating costs for years 8-15 at end of is years. -> Sy = 80,00€ 10...30-1] = $914871 Its present nalue (Py) will be RE_914871 - $ 219012.8 (. 5 - Present nalue of operating cost for 16th year for $95000 Ps: - $95000 $10,674.77 for later year Present halue, 26 ,5 9 Coro --$18993.) for 18th year Besent value 2 :- $92000 $17446.3 for 18th year Praesent value ; - - 98000 - $16023.8 for 20th year Present value ; P =-$ 99400 = - $14915.7 Net presente halluce of the plante h e t Pal restreuse Salvage natue at end of plant = Present salvage nelle no $3,56,000 +852025.27 Net present value of plant = helt Benen. Pio = -$634422-5 $ 350,000 (1-770

in Formulae used ci) SP Plitija os P = Sin where sis future value Po present worth i i interest rate nu no. of years. S= Ruti)?,] where R is the annual deposit at year's end. using above epr (i) in : we get p=R litija] - ilton every Futurre natue of the . end of 20 years plant le natue at =- $634422. 5x11.1920 -$4268077