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    Pete407 HW1

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    Alwaleed A
    1) The document provides details for an assignment question from a petroleum economics class, including 5 loan options for investing $50,000 at 20% annual return over 15 years. 2) The student calculates cash flows for each loan option in detail using provided equations. Option 2, with a 10-year, 10% interest loan, provides the highest ending cash flow and investment value. 3) Option 3 would result in bankruptcy as the investment profits would not cover the first loan repayment. Option 2 is ranked the best overall. 4) For a 1% monthly interest rate, the nominal annual rate is 12% and the effective annual rate is 12.6825%.

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    Pete407 HW1

    Uploaded by

    Alwaleed A
    22 views4 pages
    1) The document provides details for an assignment question from a petroleum economics class, including 5 loan options for investing $50,000 at 20% annual return over 15 years. 2) The student calculates cash flows for each loan option in detail using provided equations. Option 2, with a 10-year, 10% interest loan, provides the highest ending cash flow and investment value. 3) Option 3 would result in bankruptcy as the investment profits would not cover the first loan repayment. Option 2 is ranked the best overall. 4) For a 1% monthly interest rate, the nominal annual rate is 12% and the effective annual rate is 12.6825%.

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    1) The document provides details for an assignment question from a petroleum economics class, including 5 loan options for investing $50,000 at 20% annual return over 15 years. 2) The student calculates cash flows for each loan option in detail using provided equations. Option 2, with a 10-year, 10% interest loan, provides the highest ending cash flow and investment value. 3) Option 3 would result in bankruptcy as the investment profits would not cover the first loan repayment. Option 2 is ranked the best overall. 4) For a 1% monthly interest rate, the nominal annual rate is 12% and the effective annual rate is 12.6825%.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    22 views4 pages

    Pete407 HW1

    Uploaded by

    Alwaleed A
    1) The document provides details for an assignment question from a petroleum economics class, including 5 loan options for investing $50,000 at 20% annual return over 15 years. 2) The student calculates cash flows for each loan option in detail using provided equations. Option 2, with a 10-year, 10% interest loan, provides the highest ending cash flow and investment value. 3) Option 3 would result in bankruptcy as the investment profits would not cover the first loan repayment. Option 2 is ranked the best overall. 4) For a 1% monthly interest rate, the nominal annual rate is 12% and the effective annual rate is 12.6825%.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    King Fahd University of Petroleum &

    Minerals
    College of Petroleum Engineering &
    Geosciences
    Department of Petroleum Engineering

    PETE 407 - (Petroleum Economics)

    HW (1)
    Instructor: Dr. Sulaiman Alarifi

    Alwalid Albaqmi

    2018 63 480

    Sec. No. 2

    September 14, 2021


    Q1: [90 points] Your O&G company is given the opportunity to invest in a

    project today that yields 20% per year compounded annually for 15 years. You

    will be able to withdraw all or part of your earnings (not the capital investment)

    at the end of each year. You don’t have any money to invest right now so you

    want to get a loan and you are faced with many options from the bank:

    Option 1: Bank will loan you the $50,000 today. The loan is due in 5 years, with a

    compound interest of 5% per year.

    Option 2: Bank will loan you the $50,000 today. The loan due is 10 years, with a

    compound interest of 10% per year.

    Option 3: The loan is divided into two payments, you will receive $25,000 today

    and $25,000 after 5 years. Each loan period is 5 years with a compound interest

    of 10% per year.

    Option 4: The loan is divided into two payments, you will receive $40,000 today

    and $10,000 after 5 years. Each loan period is 5 years with a compound interest

    of 5% per year.

    Option 5: Bank will loan you the $50,000 today. The loan period is 15 years, with

    a compound interest of 15% compounded monthly.

    Assume you have no other source of income and you will have to declare

    bankruptcy if the loan due date arrives without you having a sufficient fund

    from your investment to payback the bank

    a- Calculate in details the cash flow of your investment for each loan structure

    option.

    Using the following set of equations, the detailed calculations are done and presented

    through Excel,

    F inv=P ( 1+ ie )n
    I =F inv−P

    F loan=P ( 1+ ie )n

    CF=I −Floan

    Where ie is obtained from the following,

    i= ¿
    m

    ie=( 1+i )m−1

    Applying these equations on each loan structure as shown in Excel, the following

    summary table is obtained,

    Summary Option 1 Option 2 Option 3 Option 4 Option 5


    Loan Given ($) 50,000 50,000 25,000 40,000 10,000 50,000
    Due Date (Years) 5 10 5 5 5 15
    Loan Annual Effective Interest 5% 10% 10% 5% 5% 16.0755%
    Loan Payback ($) 63,814 129,687 40,263 51,051 12,763 467,817
    Investment Period (Years) 15
    Investment Annual Effective Interest 20%
    Investment Value at Loan Due Date ($) 124,416 309,587 62,208 99,533 145,521 770,351
    Investment Profit at Loan Due Date ($) 74,416 259,587 37,208 59,533 95,521 720,351
    Cash Flow at Loan Due Date ($) 10,602 129,900 (3,055) 8,482 82,758 252,534

    End Investment Value (after 15 years) Bankruptc


    375,231 447,648 330,344 302,534
    ($) y
    Bankruptc
    End Cash Flow (after 15 years) ($) 325,231 397,648 280,344 252,534
    y

    Ranking 2nd 1st 5th 3rd 4th


    Please Refer to Excel to examine the calculations in detail.

    b- Is there an option from the five options where you would have to declare

    bankruptcy? IF so, which ones and why?

    Yes, Option 3, because at the end of the first loan period, the cash flow is negative

    due to investment not making enough profit to cover the loan payback. Hence, the
    bank will not lend the company the second loan unless the first loan is paid, therefore,

    the company will declare bankruptcy even before the investment ending period.

    c- What is the best option for you, why? Rank them.

    Best option is Option 2 because it has the highest cash flow after the investment

    period ended, and as well, if we consider the company's assessts, it has the highest

    investment value at the end of the investment period. Ranking the options will be,

    Option 2, Option 1, Option 4, Option 5, Option 3.

    Q2: [10 points] For an interest rate of 1% per month, calculate the nominal and

    the

    effective annual interest rates?

    Where ie is obtained from the following,

    i n=i∗m=1%∗12=12 %
    m 12
    ie=( 1+i ) −1=( 1+0.01 ) −1=12.6825 %

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