Separate Cash Flow Evaluations - Applications to Investment Decisions and Tax Design
AbstractOil project assessment using separate cash flow valuation (Jacoby and Laughton, 1992; Laughton and Jacoby, 1993; Emhjellen and Alaouze, 2002), presumes that the present value of the cost cash flow of oil projects can be calculated using a risk free rate. This paper examines whether this practise, at least to a first approximation, is reasonable. More specifically, the paper examines whether labour wage hours costs and steel prices – as cost factors in the investment cost stream – are systematic risk factors (i.e., have a beta different from zero). The paper also investigates whether oil price as a factor in the revenue stream is a systematic revenue factor. Separate cash flow evaluation has been discussed in relation to petroleum taxation. A petroleum tax commission in Norway stated that tax reductions due to depreciation should separately be discounted by a risk free rate. We discuss the role of partial cash flow discounting in tax design.
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Bibliographic InfoPaper provided by University of Stavanger in its series UiS Working Papers in Economics and Finance with number 2009/16.
Length: 26 pages
Date of creation: 09 Apr 2009
Date of revision:
Publication status: Forthcoming in International Journal of Global Energy Issues, 2010.
Oil; project; evaluation;
Other versions of this item:
- Magne Emhjellen & Petter Osmundsen, 2011. "Separate cash flow valuation – applications to investment decisions and tax design," International Journal of Global Energy Issues, Inderscience Enterprises Ltd, vol. 35(1), pages 43-63.
- A10 - General Economics and Teaching - - General Economics - - - General
This paper has been announced in the following NEP Reports:
- NEP-ACC-2009-04-18 (Accounting & Auditing)
- NEP-ALL-2009-04-18 (All new papers)
- NEP-ENE-2009-04-18 (Energy Economics)
- NEP-PPM-2009-04-18 (Project, Program & Portfolio Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Lund, D., 1990.
"Petroleum Taxation under Uncertainty-Contingent Claims Analysis with an Application to Norway,"
24/1990, Oslo University, Department of Economics.
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- David G. Laughton & Henry D. Jacoby, 1993. "Reversion, Timing Options, and Long-Term Decision-Making," Financial Management, Financial Management Association, vol. 22(3), Fall.
- Emhjellen, Kjetil & Emhjellen, Magne & Osmundsen, Petter, 2002. "Investment cost estimates and investment decisions," Energy Policy, Elsevier, vol. 30(2), pages 91-96, January.
- David Laughton, 1998. "The Management of Flexibility in the Upstream Petroleum Industry," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 83-114.
- Osmundsen, Petter, 1999. "Risk sharing and incentives in norwegian petroleum extraction," Energy Policy, Elsevier, vol. 27(9), pages 549-555, September.
- David G. Laughton, 1998. "The Potential for Use of Modern Asset Pricing Methods for Upstream Petroleum Project Evaluation: Concluding Remarks," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 149-153.
- Osmundsen, Petter & Emhjellen, Magne, 2010. "Decision criteria for climate projects," UiS Working Papers in Economics and Finance 2010/2, University of Stavanger.
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