SPE Project Economics 2

Question 1

A project has an NPV of $0 at a discount rate of 18%. What does this indicate?

Accepted Answer

18% is the project's internal rate of return

Answer

The project generates no cash flows

Answer

The project should be rejected

Answer

The discount rate is too high for evaluation

Question 2

Which of the following best describes a 'sunk cost' in petroleum project economics?

Accepted Answer

Costs already incurred that cannot be recovered

Answer

Future capital expenditure already budgeted

Answer

Variable operating costs tied to production rate

Answer

Royalty payments owed to the government

Question 3

A well produces 500 BOPD with a lifting cost of $12/bbl and an oil price of $70/bbl. What is the daily net operating income?

Accepted Answer

$29,000

Answer

$35,000

Answer

$6,000

Answer

$41,000

Question 4

What is the primary purpose of a sensitivity analysis in project economics?

Accepted Answer

To identify which input variables most affect project value

Answer

To calculate the exact project IRR

Answer

To determine the optimal royalty rate

Answer

To compute decline curve parameters

Question 5

Under a production sharing contract (PSC), 'cost oil' refers to:

Accepted Answer

The share of production used to recover capital and operating costs

Answer

Oil revenue paid as income tax

Answer

Royalty oil allocated to the host government

Answer

The cost of transporting oil to market

Question 6

Which discount rate is most appropriate when evaluating a petroleum project where the company's cost of financing is well-defined?

Accepted Answer

Weighted average cost of capital (WACC)

Answer

Risk-free rate (e.g., treasury bond rate)

Answer

Inflation-adjusted prime rate

Answer

Commodity price escalation rate

Question 7

A project's profitability index (PI) is calculated as 1.35. This means:

Accepted Answer

For every $1 invested, the project returns $1.35 in present value

Answer

The project has a 35% IRR

Answer

The payback period is 1.35 years

Answer

The project NPV is negative