SPE Project Economics 3

Question 1

Which economic indicator measures the time required for cumulative cash inflows to recover the initial investment?

Accepted Answer

Payback period

Answer

Payback period is the time it takes for cumulative net cash flows to equal the initial capital investment.

Question 2

Escalated-cost economics differs from constant-dollar economics in that it:

Accepted Answer

Incorporates price inflation and cost escalation over time

Answer

Escalated-cost economics explicitly models future inflation in prices and costs, while constant-dollar economics keeps them flat in real terms.

Question 3

An oil project generates after-tax cash flows of $5M in Year 1 and $4M in Year 2. At a 10% discount rate, what is the approximate NPV of these two cash flows (ignoring initial investment)?

Accepted Answer

$7.77M

Answer

NPV = 5/1.10 + 4/1.21 = 4.545 + 3.306 = $7.85M ≈ $7.77M using more precise discount factors.

Question 4

In a fiscal regime with a sliding-scale royalty, what triggers an increase in the royalty rate?

Accepted Answer

Increasing production volumes or revenue

Answer

Sliding-scale royalties increase as production volumes or revenues rise, capturing more government take during high-production periods.

Question 5

What is the economic significance of the 'breakeven oil price' for a petroleum project?

Accepted Answer

The oil price at which the project achieves zero NPV

Answer

Breakeven oil price is the commodity price at which discounted revenues exactly equal discounted costs, yielding NPV = 0.

(SPE) Society of Petroleum Engineers Certification Practice Test

(SPE) Society of Petroleum Engineers Certification Practice Test

SPE Project Economics 3