Study On Forecasting In Oil Well Economics Finance Essay - Free Essay Example

Sample details Pages: 7 Words: 2033 Downloads: 1 Date added: 2017/06/26 Category Finance Essay Type Research paper Did you like this example? 1.0 INTRODUCTION The quest by oil companies, stakeholders and investors in petroleum resources to reduce expenditures on oil and gas projects while at the same time increasing profit has led to increased technological development in forecasting oil well economics before investments are made on these projects. One of such developments was the introduction of a computer-based software called Petro$ in 1994 for the purpose of petroleum economics evaluation. The report which is based on forecasting of oil well economics using the petro$ software is structured in four parts to show the data the file, sensitivity analysis, an excel spreadsheet showing how the forecast can be done without using the petro$ software (a comparison of both methods) and finally a critical review of the outputs obtained from the forecasting. Don’t waste time! Our writers will create an original "Study On Forecasting In Oil Well Economics Finance Essay" essay for you Create order 1.1 FORECASTING IN OIL WELL ECONOMICS Forecasting is the process of estimating unknown situations. In simplified term, forecasting sees the present as the key to the future. Every business, economic and investment decision making rely on forecasting since the future is not known with certainty. With forecasting, the areas of uncertainty that often surround decision with respect to capital investment, sales, costs, profits, production etc is reduced. Forecasting has turned out to be one of the most relevant aspects of planning given the uncertainty that the future holds. The need for forecasting cannot be underestimated as they can help in financial, production and economic planning, workforce scheduling and most importantly decision making. In a case where an economic downturn is envisioned, forecasting can help investors cut back on their investments. On the other hand, where a bloom seems probable, investors can use far reaching measures to maximize profits. The oil and gas industry being one that is capital-in tensive with majority of her projects requiring substantial and risky investments in acquisition, exploration, operation and maintenance, rely on forecasting. The decision to invest or not in projects in the oil and gas industry usually starts with critical decision making during the exploration phase of a new project or the expansion of an already existing one. Tools used in decision making for the analysis of project risk under conditions of uncertainty help companies determine the degree of success or loss, and will determine the decision of developing or abandoning the project. The development of a detailed cash flow analyses and a comprehensive and systematic evaluation of potential investments helps determine as accurately as possible, the expected returns in the investments under various conditions of uncertainty over the expected productive life of the project. To achieve this, the development of a realistic, sound and carefully structured cash-flow projection that wil l reflect the  initial capital expenditures  needed for the acquisition, development, operations and maintenance of the new oil or gas prospect throughout its anticipated productive life is of paramount importance. (Oxford Management Centre, 2009). Judging from the fact that most petroleum projects require large scale investment, it is often important that decisions on investment be made on a complete and thorough analysis of variables and uncertainties as the ability to assess the viability of investments and the real value of oil and gas assets is very critical to success. 2.0 METHODOLOGY FOR DATA GENERATION NAD DATA FILE The results obtained in this oil well economics forecasting were generated from two data sets. The projects cost currency is in million pounds ( £m). The first set, the base case was given while the other case was generated by changing the product prices. The input data used for these cases are shown in table 1. The results returned obtained from running these inputs in the petro$ software returned amongst other output the cash flow analysis; and production and prices as shown in tables 2 and 3. 3.0 SENSITIVITY ANALYSIS It is known from intuition that majority of the variables that decides any projects cash flow could be different from the values used in the analysis and that an alteration in a key input variable will definitely result in a change in the NPV. One simple method of determining the effects of a change in one or more inputs variables in a forecast is sensitivity analysis (Investopedia).Sensitivity analysis according to Megginson et al (2008) is a tool that allows analyst assess the impact of individual assumptions on decisions variable such as a projects NPV by determining the effect of changing one variable while others are kept constant. Changes in variables are assessed one after the other to identify the key variables. In sensitivity analysis, a base-case is developed via the expected values for each input while one or more variable is altered by a number of percentage points below and above the expected value, keeping all other variables constant. The input variable used fo r this is either increased or decreased to determine the projects NPV and IRR. This is one very useful tool for determining the consequences the actual outcome of a particular variable will have if it contradicts what the key prediction(s) was. (Besley and Birgham, 2008). The net present value is extremely sensitive to changes in the variable costs and product prices, moderately sensitive to units sold and growth rate changes and least sensitive to changes in the capital and fixed costs. In a case where the the uncertainty in the project is exceptionally high, the project maybe redesigned to eliminate the uncertainty (www.adb.org). The modelled scenario shows the sensitivity of the investment to changes in the product prices. Tables 4 and 5 shows the sensitivity report of the base case and scenario case respectively. Charts showing the output of the sensitivity run are illustrated in the figures 1-15 4.1 THE CONCEPT OF CASH FLOW ANALYSIS Being a generic term, cash flow may mean different thing to different people depending on the context. Simply put, cash flow is the movement of cash in and out of a project or business. Inflows of cash in a business usually arise from either of investing, financing or operations while outflows of cash arise from expenses. Analyzing any business cash flow is aimed at keeping a sufficient cash flow for the business and to give a basis for the management of cash flow. Results from a cash flow analysis can be used for the purpose of determining a projects value (rate of return), evaluating the risks in a business or investment, and to determine the potential of a business liquidity. Cash flow analysis is a very crucial aspect of a business operation as it determines the solvency of a business. Periodic cash flow analysis makes easy the identification of cash flow associated problems and can provide ways of improving the solving the problem. As far as possible, it is very cruci al that a positive net cash flow be maintained. 4.1.1 DISCOUNTED CASH FLOW In this report, the output generated by Petro$ was used to determine the discounted cash flow. Russ Bingham (2000) in DCF models and rate of return perspective sees the discounted cash flow as an approach of assessing performance. It uses the concept of time value of money for a project or an asset valuation. Discounted cash flow is a commonly used economic modelling tool for economic forecasting purposes where the analyst calculates the present value of a companys or firms future cash flows. It uses a companys cash flow projections and discounts them using a discount rate to arrive at a present value. This present value is then used as a yard stick to determine the investment potential. Basically, a DCF analysis tells how attractive a business will be. The opportunity of investing in a business may be good if the results of the DCF analysis exceed the current cost of the investment. As opined by Hilton (1991), the net present value (NPV) and the internal rate of return (IRR) are primary methods used in any DCF analysis. A few assumptions exist on the use of DCF analysis.  Ãƒâ€šÃ‚ ´ That the analysis is done in a perfect capital market;  Ãƒâ€šÃ‚ ´ Cash flows are handled as if they were done at the end of the year;  Ãƒâ€šÃ‚ ´The analysis treats cash flows used in investment as if they were known with certainty whereas the possibility of risk adjustments can be made in an NPV analysis to account for uncertainties in cash flow.  Ãƒâ€šÃ‚ ´ NPV and IRR methods of discounted cash flow assume all cash inflows are reinvested in other projects that will earn more money for the business. Practically, Hilton admits that these assumptions are seldom met. This notwithstanding, the method provides an effective means of analysing investments. 4.1.2 NET PRESENT VALUE (NPV) The net present value (NPV) is one of the discounted cash flow evaluation techniques. Because NPV gives absolutely considers the time value of money, it is seen as a sophisticated capital budgeting method that is determined by deducting a projects initial investment from the present value of its cash inflows and discounted at a rate equals to the companys capital cost. Often called the discount rate, this rate is the least return that must be earned on a project so that the companys market value remains unchanged. (Gitman, 2003). As a rule opined by Gitman (2003), a project should be invested in if the NPV equals or exceeds zero because the company will have a return that exceeds its capital cost and this will promote the market value of the company as well as its owners wealth. On the other hand, the project should not be considered if the NPV is not greater than zero as the project will give insufficient financial benefits to justify the investment especially when there are al ternative investments that will at least provide the rate of return on the investment. Theoretically, this implies that a company will choose all projects with a positive NPV. In summary, Gitman postulates that where a problem of choosing between two or more projects that yield positive net present value exist, the one with the greatest NPV be selected. Being one of the most frequently used techniques of calculating the feasibility of capital expenditures, NPV is a useful tool in investment decision making for the reasons that:  Ãƒâ€šÃ‚ ´ it appreciates the concept of time value of money that says a dollar earned today is worth more than than a dollar earned five years from now (Odellion Research, 2006).  Ãƒâ€šÃ‚ ´ it is the only appraisal technique where the outputs from its analysis has direct link on the wealth of the business (Atrill et al pg 454).  Ãƒâ€šÃ‚ ´ it gives depth and flexibility as the NPV equation can integrate other tools of fina ncial analysis like scenario analysis as well as adjust for inflation (Odellion Research,2006).  Ãƒâ€šÃ‚ ´ it integrates the risk affiliated with the project through the discount rate or expected cash flows (Odellion Research, 2006).  Ãƒâ€šÃ‚ ´ it removes inconsistencies in accounting as cash flows are not representative of accounting profits but benefits of the project.NPV also determines the expected cash flow produced from the project and integrates the unique risk of getting those cash flows. The following are factors that limit the applicability of the NPV method.  Ãƒâ€šÃ‚ ´ It is just known that a project has a +NPV or -NPV. It does not tell by how much or less the actual percentage of return is (Atrill et al, 2006).  Ãƒâ€šÃ‚ ´ It undervalues flexibility by not giving room to future changes as new information is gathered. In other words, it uses information obtained at the time of completing the analysis to arrive at conclusions. (Odellion Reasearch, 2006). 4.1.3 INTERNAL RATE OF RETURN Also known as economic return rate (ERR), the internal rate of return (IRR) is the discount rate (interest rate) at which the NPV of all cash flows equates zero.(investopodia). It is a commonly used capital budgeting technique by financial analysts to evaluate the viability and/or attractiveness of an investment. An investment is more desirable if its IRR is high. As such, a project with the highest IRR would most likely be considered the most excellent and undertaken first amongst a least of other projects with appreciable IRR provided all factors are common amongst the projects. It is easier to judge and make decisions using output from an IRR than other financial metrics (NPV) because of the ease of understanding and interpreting an IRR result. This notwithstanding, it should not be used in isolation but in conjunction with other comparable valuation metrics and the NPV when making a case for an investment decision.

Cognitive Psychology Essay - 1753 Words

Cognitive Psychology Psychology is defined as the study of mind, emotion and behaviour. One major perspective within psychology is known as cognitive psychology, which is primarily concerned with the explanation of thought processes through the development of theoretical mental systems. Cognitivism is somewhat broad in it’s approaches to psychology and only linked in it’s goal to create hypothetical mental structures to explain behaviour (â€Å"History Scope Of Psychology†). The exact origins of cognitivism are difficult to pinpoint. Ideas that make up the perspective have been traced back to ancient Greece;†¦show more content†¦It aims to understand the mental accompaniment of everyday perceptions and actions (Barber, 1988). By devising mental structures of mental functions and the way in which information is processed, it could then be possible to explain observable behaviour. The most significant concept of cognitivism is the computer or information processor metaphor. 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Business Project Plan

Question: Discuss about the Business Project Plan. Answer: Proposal Working Title: Usefulness of Accounting Information for Mangers and the Company to Take Better Decisions Project Description: Project Aim: The project aims to identify the usefulness of accounting information in taking better business decision by the managers of a company. Background of the Project: Accounting records provide information for the financial year on the overall performance of an organization. It helps the company to work efficiently, meet the legal requirements and create a better stakeholders relationship. Accounting information is used by the small and medium sized business organization as well as large organization that provide a clear understanding of financial data. Financial statement is the most important element of the accounting information that is prepared at the end of the financial year and helps in taking business decisions in a better way (Christensen, Nikolaev Wittenberg, 2016). Managers face several problems in taking better business decisions like not involving the adequate participation of shareholders and other organizational members. The management also does not involve sufficient time to find the appropriate solutions for the problems. In case of Wesfarmers Limited the owners and management has been accounted as the largest company in the Australian market. That company has managed to expand its business in different countries other than the Australia. It is because of the fair decisions and best business strategies with the help of accounting information related to the previous and current financial years. In the financial year 2015, the company had earned revenue of around $62,447 million while in the year 2014 it was around $60,181 million. Such increase in the gross revenue shows the effective business operating strategy by the management of the company (Home Wesfarmers, 2016). Accounting information is a procedure of collecting business operation data related to different departments for determination of the performance of the company in a financial year. However, the company also faced some of the criticism regarding the business decisions on using a phosphate substance for producing the products. The same has been declared in the annual report back in the year 2012 that affected its financial statements. Hence, it is essential to take wise decisions for operating business to maintain its growth and sustainability (Home Wesfarmers, 2016). Significance of the Project: Accounting of a company represents the performance of the business operation with respect to its revenue, expenditures, investment, liabilities and other essential details. Accounting is a recording and recognition of business transactions with transparency and accuracy that enables the company to move in the right direction. Due to the fair representation of accounting data, management of Wesfarmers Limited could expand its business in the right direction even after the controversy (Home Wesfarmers, 2016). Some of the essential usefulness of the accounting information is described as under: Performance of management: The most common use of accounting information is to measure the performance of the business operations. Financial statements are the essential element of accounting information that reflects the profits and losses earned by the company along with other necessary information (Huian, 2015). The users of the financial reports of the company can gather information about the companys capital investment, fixed assets, current assets, liabilities and advances. It also presents various financial ratios that define the position of the company in each of the business segments. Information on the current ratio, capital gearing ratio, interest coverage ratio, sales ratio, fixed assets to sales ratio and other relevant ratios in different areas of operation of the business. Create Budgets: In order to operate a business effectively, the management is required to prepare a financial budget. To prepare a budget statement accounting information is used to get a detailed analysis on different functional areas. Budgets are prepared to forecast and plan the business operations so that the resources are used in the most effective manner. At the same time costs of production of goods and services can be controlled that helps in generating maximum revenue. Accounting information of previous years is used for the purpose of comparison and formulating the percentage to forecast increase/ decrease trend in the financial as well as production part (Cassar, Ittner Cavalluzzo, 2015). Business Decisions: Most critical and important usefulness of accounting information is in making better business decisions. It includes decision on expanding the business, investing in new assets or equipments, using the economic resources or reviewing latest opportunities. Accounting information also provides the analysis of cost incurred or to be incurred in using various resources for operating the business. Such costs in turn help in comparing with the potential income from the new opportunities during the financial inquiry for the future years (Andon, Baxter Chua, 2015). Investment decisions: Accounting information plays an important role for the purpose of investment on part of the external stakeholders. Small shareholders, large investors, banks, venture capitalists and other investors review the financial statements of the company that involves financial activity. The accounting information on different aspects like companys turnover, subscribed capital, investment on fixed assets, liabilities and other related information are being gathered to employ money in the form of investment (Williams Ravenscroft, 2015). For this purpose capital budgeting statement is prepared that requires sound knowledge in accounting principles and standards. Moreover, the accounting information is useful to expand the business locally, nationally as well as internationally. Similarly, in the case of Wesfarmers Limited, which expanded its business in different territories apart from Australia faced some decision-making problems. The problems that are faced by the management while decision- making may be structured, unstructured, or even semi- structured. In most of the cases, management faces structured problems that involve errors in application of relevant principles and standard while preparing budgets or while estimating investments. These problems eventually affect the management in taking correct decision in operating its business. Hence, the management should have fundamental knowledge and skills on applying relevant accounting principles (Home Wesfarmers, 2016). In order to resolve the issue, it is essential to have sound knowledge about the concepts of accounting principles and standards so that there can be accurate application of the accounting data. Application of accounting standards and principles as per International Financial Reporting Standards in preparing the budget statements lead to generate correct and accurate estimation. It assists the managers showing correct net present value (positive/ negative) for the purpose of investment in new projects (Sari, SE Purwanegara, 2016). If the result shows positive net present value, the managers take steps to move ahead for the investment whereas if the result is negative the investment plan is declined. Further, previous years accounting information on the financial statement shows net profit or loss earned by the organization. In addition, it shows the comparative results of two previous years that are used to project trends for future years. Such trend helps the management in planning for payment of dividends, retention of profits, investment for new projects etc. Therefore, accounting information should be incorporated accurately to avoid the errors so that correct and better business decisions can be taken (O'Dwyer Unerman, 2016). Research Question: Following are the research questions that are important in stating the usefulness of accounting information in taking business decisions. How does accounting information have impacts on the process of business operation decisions? What could be the impact on the performance of business without considering the accounting information? What is the usefulness of general accounting standards and principles for preparing the accounting statements that assists in taking better business decisions? How does the accounting information helps in taking fair and transparent business decisions to meet the organizations objectives and policies? How does the accounting information helps in taking fair decision for prospect investment to expand the business? Gantt Chart and Assessment Milestone Gantt Chart: Activities Week 1 Week 2 Week 3 Identification of the project topic (first day 3 hours) Setting the objectives of the project (first day 4 hours) Background research work (first day 4 hours, next two days) Drafting the research question (fourth day) Collection and analysis of relevant data (first three days) Identification of the results (fourth day) Final project report preparation (first three days) Submission of the project (fourth day) Table 1: Gantt chart Assessment Milestone: Achievements Years Top National Export Award for increase of export sales by 12% in the worst scenario of international market 2009 Improvement in accuracy of systems of capturing incidents by 7.5% 2015 Increase in direct contributions to the society by 12% with total contributions more than $100 million 2015 Table 2: Assessment Milestone (Source: Home Wesfarmers, 2016) Reference List: Andon, P., Baxter, J., Chua, W. F. (2015). Accounting for stakeholders and making accounting useful.Journal of Management Studies,52(7), 986-1002. Cassar, G., Ittner, C. D., Cavalluzzo, K. S. (2015). Alternative information sources and information asymmetry reduction: Evidence from small business debt.Journal of Accounting and Economics,59(2), 242-263. Christensen, H. B., Nikolaev, V. V., Wittenbergà ¢Ã¢â€š ¬Ã‚ Moerman, R. (2016). Accounting information in financial contracting: The incomplete contract theory perspective.Journal of Accounting Research,54(2), 397-435. Home - Wesfarmers. (2016). Wesfarmers.com.au. Retrieved 23 July 2016, from https://www.wesfarmers.com.au Huian, M. C. (2015, December). The usefulness of accounting information on financial instruments to investors assessing non-financial companies. An empirical analysis on the Bucharest Stock Exchange. In10th International Conference on Accounting and Management Information Systems(pp. 10-11). O'Dwyer, B., Unerman, J. (2016). Fostering rigour in accounting for social sustainability.Accounting, Organizations and Society,49, 32-40. Sari, N. Z. M., SE, M., Purwanegara, H. D. (2016). The Effect of Quality Accounting Information System in Indonesian Government (BUMD at Bandung Area).decision-making,7(2). Williams, P. F., Ravenscroft, S. P. (2015). Rethinking decision usefulness.Contemporary Accounting Research,32(2), 763-788.