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Separate Cash Flow Evaluations - Applications to Investment Decisions and Tax Design


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  • Emhjellen, Magne
  • Osmundsen, Petter

    (University of Stavanger)


Oil 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 Info

Paper provided by University of Stavanger in its series UiS Working Papers in Economics and Finance with number 2009/16.

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Length: 26 pages
Date of creation: 09 Apr 2009
Date of revision:
Publication status: Forthcoming in International Journal of Global Energy Issues, 2010.
Handle: RePEc:hhs:stavef:2009_016

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Postal: University of Stavanger, NO-4036 Stavanger, Norway
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Keywords: Oil; project; evaluation;

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  1. Osmundsen, Petter, 1999. "Risk sharing and incentives in norwegian petroleum extraction," Energy Policy, Elsevier, Elsevier, vol. 27(9), pages 549-555, September.
  2. David G. Laughton & Henry D. Jacoby, 1993. "Reversion, Timing Options, and Long-Term Decision-Making," Financial Management, Financial Management Association, Financial Management Association, vol. 22(3), Fall.
  3. Schall, Lawrence D, 1972. "Asset Valuation, Firm Investment, and Firm Diversification," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 45(1), pages 11-28, January.
  4. Emhjellen, Kjetil & Emhjellen, Magne & Osmundsen, Petter, 2002. "Investment cost estimates and investment decisions," Energy Policy, Elsevier, Elsevier, vol. 30(2), pages 91-96, January.
  5. 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, International Association for Energy Economics, vol. 0(Number 1), pages 149-153.
  6. Lund, Diderik, 1992. "Petroleum taxation under uncertainty: contingent claims analysis with an application to Norway," Energy Economics, Elsevier, Elsevier, vol. 14(1), pages 23-31, January.
  7. David Laughton, 1998. "The Management of Flexibility in the Upstream Petroleum Industry," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Number 1), pages 83-114.
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Cited by:
  1. Osmundsen, Petter & Emhjellen, Magne, 2010. "Decision criteria for climate projects," UiS Working Papers in Economics and Finance, University of Stavanger 2010/2, University of Stavanger.


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