Changes

==Expected net present value and ENPV to expected investment ratio==

==Expected net present value and ENPV to expected investment ratio==

The ''expected net present value'' (ENPV) and ''the expected net present value to expected investment ratio'' are two highly recommended economic parameters for comparing and ranking projects, primarily because these concepts take into account the uncertainty and help in predicting outcomes of program inventories. They are particularly useful as exploration measures and less so for development projects.

The ''expected net present value'' (ENPV) and ''the expected net present value to expected investment ratio'' are two highly recommended economic parameters for comparing and ranking projects, primarily because these concepts take into account the uncertainty and help in predicting outcomes of program inventories. They are particularly useful as exploration measures and less so for development projects.

The ENPV considers the net after-tax monetary value of the venture over the full life of the project (gross revenues minus capital investments and costs) discounted at the corporate discount rate. It incorporates current views on future wellhead prices, costs, and inflation rates and also takes into account the probabilities of success and failure as well as the cost of failure. Thus, it is a “risked” value and is the amount the company could expect to make on average if this prospect (or ones like it) could be undertaken many times.

The ENPV considers the net after-tax monetary value of the venture over the full life of the project (gross revenues minus capital investments and costs) discounted at the corporate discount rate. It incorporates current views on future wellhead prices, costs, and inflation rates and also takes into account the probabilities of success and failure as well as the cost of failure. Thus, it is a “risked” value and is the amount the company could expect to make on average if this prospect (or ones like it) could be undertaken many times.

If the development well modeled in Table 1 in [[Building a cash flow model]] had been assigned an 80% chance of success by the geologist, the calculated ENPV (aftertax) at 4% would be [[cost::713,480 USD]] (0.80 × [[cost::1,015,600 USD]] – 0.20 × [[cost::495,000 USD]]). Since this is a linear function, a plot of ENPV versus the probability of success results in a straight line. Assume two points (''P''_s = 1 and 0) to define the line. The intersection where the ENPV is zero will give the breakover point for the probability of success. Figure 3 demonstrates this concept. The breakover probability of success for the development well is approximately 33%.

If the development well modeled in Table 1 in [[Building a cash flow model]] had been assigned an 80% chance of success by the geologist, the calculated ENPV (aftertax) at 4% would be [[cost::713,480 USD]] (0.80 × [[cost::1,015,600 USD]] – 0.20 × [[cost::495,000 USD]]). Since this is a linear function, a plot of ENPV versus the probability of success results in a straight line. Assume two points (''P''_s = 1 and 0) to define the line. The intersection where the ENPV is zero will give the breakover point for the probability of success. [[:file:key-economic-parameters_fig3.png|Figure 3]] demonstrates this concept. The breakover probability of success for the development well is approximately 33%.

 

[[file:key-economic-parameters_fig3.png|thumb|{{figure number|3}}Expected value profile plot. Expected value is plotted versus probability of success example for development well and multiwell extension project.]]

If the extension project had been assigned a 70% chance of success by the geologist, the calculated ENPV (after-tax) at 4% would be [[cost::1,613,832 USD]] (0.70 × [[cost::2,729,760 USD]] – 0.30 × [[cost::990,000 USD]]). The breakover probability of success for the extension project is approximately 27% (see Figure 3).

If the extension project had been assigned a 70% chance of success by the geologist, the calculated ENPV (after-tax) at 4% would be [[cost::1,613,832 USD]] (0.70 × [[cost::2,729,760 USD]] – 0.30 × [[cost::990,000 USD]]). The breakover probability of success for the extension project is approximately 27% (see Figure 3).