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Petroleum Economics and Asset Management

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The internal rate of return was also considered since it is a special case of the net present value approach. Through this approach, an interest rate that would exactly discount each project's estimated future cash flows to the present value of its initial capital investment. In other words, the rate that would make the project to give zero net present value. , a minimum internal rate of return is usually established, under which a project is rejected. In this scenario, your company did not have a minimum acceptable rate of return. Therefore, the cash flows were tested through sensitivity analysis for projects, mineral properties, and mineralization valuation and ranking before your company goes ahead to develop them.

Consideration of the payback period was also considered necessary. It was aimed at determining the time it would each project to produce enough cash flows to cover its initial investment costs. Through this approach, the value of the mining projects was established by ranking them by the time each would take to recover the initial capital outlay from the project's cash flows. Table 1, 2, 3, 4, 5, and 6 below show the various cash flows that are involved in every project.

These cash flows include the initial investment costs, additional annual costs, annual incomes, repair costs, and the tax. In addition, the net cash flows of each project were computed. Basically, the approaches used to evaluate the viability of these projects are the discounted cash flow approaches. These approaches have uncertainties in the input parameter values. Such uncertainties surround the prices of wells, commodities, production rate, mining and processing costs. To address these risks, the projects will be managed in a constant manner through a constant discount rate.

According to Iloilo and Iloilo (2009, p. 149), the decision tree method will be used to eliminate these disadvantages since it gives discrete probabilities of these variables occurring.

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