Question

11-64: The Red River oil field will become less productive each year. Rojas Brothers is a small company that owns Red River, which is eligible for percentage depletion. Red River costs $2.5M to acquire, and it will be produced over 15 years. Initial production costs are $4 per barrel, and the wellhead value is $10 per barrel. The first years' production is 90,000 barrels, which will decrease by 6000 barrels per year. (a) Compute the annual depletion (each year may be cost-based or percentage-based). (b) What is the PW at i = 12% of the depletion schedule?

Answer 1

a..Cost-based depletion schedule
Year	No.of Barrels produced	Annual depletion cost	PW F at i=12%	PW at 12%
1	2	3=2500000/720000*No.of barrels produced	4=1/(1+0.12)^Yr.n	5=3*4
1	90000	312500	0.892857	279017.9
2	84000	291666.67	0.797194	232514.9
3	78000	270833.33	0.71178	192773.8
4	72000	250000.00	0.635518	158879.5
5	66000	229166.67	0.567427	130035.3
6	60000	208333.33	0.506631	105548.2
7	54000	187500.00	0.452349	84815.48
8	48000	166666.67	0.403883	67313.87
9	42000	145833.33	0.36061	52588.96
10	36000	125000.00	0.321973	40246.65
11	30000	104166.67	0.287476	29945.43
12	24000	83333.33	0.256675	21389.59
13	18000	62500.00	0.229174	14323.39
14	12000	41666.67	0.20462	8525.826
15	6000	20833.33	0.182696	3806.172
Total	720000	2500000		1421725
(b)PW at i = 12% of the depletion schedule=	1421725