Financial Management

 Section A – Short Notes on 4 topics/questions (5 marks each) – Total 20 marks

Q1. What do you mean by Mutually exclusive projects? How do they differ from Accept –Reject projects?

Q2. Define Cash flows. How is it different from Profit? Explain the superiority of Cash flows in Investment decision making?

Q3. What do you mean by Optimal Dividend Policy?

Q4. Elucidate the relationship between NPV and IRR. When do they differ?

Section B – Long Notes on 3 topics/questions (10 Marks each) – Total 30 marks

Q5. DLF is evaluating a project costing Rs.10,00,000. The economic life of the project is 5 years and will salvage value thereafter. The variable cost and fixed cost of production are 60% and Rs.3,00,000. P.a. Tax rate applicable to the firm is 30% and the firm does not take a project unless the return is 15%. How much sales revenue it must earn every year to Break Even from different level of:

1. Cash Break even

2. Accounting Break even

3. Financial Break even

Q6. A company needs Rs. 12 Lacs for the installation of a new factory which would yield an annual EBIT of Rs. 2 lacs. The company has the objective of maximizing the EPS. It is considering the possibility of issuing equity shares plus raising a debt of Rs.200000, Rs.600000, Rs. 1000000.

The current market price per share is Rs.40 which is expected to drop to Rs.25 per share if the market borrowing were to exceed Rs. 750000.

Cost of borrowing is indicated as under:

Upto Rs.250000 10% p.a

Between Rs. 250001 and Rs.625000 14%p.a

Between Rs.625001 and Rs.1000000 16%p.a

Assuming tax rate of 50% work out the EPS and the scheme which would meet the objective of the management.

Q7 The following particulars relate to ZPCL at the end of 2011:

For its investment requirement at a project, the management of ZPCL finalized the following financial structure.

(i) Rs. 500,000 equity shares of Rs. 10 each. Present dividend per share is Rs. 15; Market price Rs. 100 per share. Growth rate in dividend 5 per cent.

(ii) Retained earnings – Rs. 200,000.

(iii) 8% Rs. 500,000 preference shares of Rs. 50 each issued at a discount of 5% redeemable at the end of 5 years.

(iv) Debentures of Rs. 1,000 each, repayable at par in 2012, were issued as follows:

Type A: 200 Type A debenture of 13 per cent issued at a premium of 10 per cent.

Type B: 100 Type B debentures of 10 per cent issued at a premium of 10 per cent.

(v) 11% term-loan of Rs. 500,000 for a period of 5 years. ABC Ltd. received the entire proceeds of the loan.

Assuming that Company is in a 50 per cent tax bracket and that it uses book values as weights, calculate the overall cost of capital of ZPCL.

Section C– Case Studies/Caselets/Situational questions (25 Marks each) – Total 50 marks

Q8. A proposal to extend the MNO Gas Company Ltd's gas distribution network to the NOIDA industrial cluster, about 40 km east of Delhi, at distance of about 20 kms from the ABC's existing transmission line, is under the consideration of its CEO, Prerna Goyal. the NOIDA industrial cluster is dominated by the textiles industry including texturising, weaving ,spinning and yarn units with over 2,500 small and medium size units. The potential of gas consumption in these industries is mainly on account of captive power. Power constitutes 40 -65 percent of the production cost in the key target sectors for gas supply. The units in the cluster have been considering reduction of power costs by moving away from the expensive grid supply to captive power generation. The total estimated potential of captive power presently is 45 MW which corresponds to 0.30 million standard cubic meters per day (MSCMD) of gas. The proposed project is essentially an extension of the distribution network in the existing Delhi distribution zone.

A market survey of potential customer to assess the gas demand potential in the region has identified over 40 customers with a combined gas demand of 0.25 MSCMD for captive power. Negotiation for gas supply has also been initiated with them. ABC Gas Ltd has received expression of interest for over 0.075 MSCMD. However, timing of gas supply is the key since alternative fuel option such as solid and liquid fuels and wind energy are available. The expression of interest would fall through if gas is not supplied by mid 2008.

Amit Kumar, an engineer consultant, is hired by Prerna Goyal to identify the most feasible and economical route for laying down the gas pipeline. A preliminary site survey is followed by reconnaissance survey by Amit. After conducting Quantified Risk Assessment and evaluating several pipeline options, the consultant has proposed a 12 inch, 150 class low pressure (19 bar) pipeline for a total length of 30 kms from the ABC's transmission pipeline. The capacity of the proposed pipeline will be 0.75 MSCMD.

The base investment/capital expenditure is estimated to be Rs 24 crore consisting of the following heads:

i) Engineering Rs 0.50 crore

ii) Project clearance Rs 1.2 crore

iii) Material costs Rs 13.2 crore

iv) Contacts Rs 7.7 crore

v) Commissioning Rs 0.10 crore and

vi) Contingency and insurance Rs 1.3 crore.

The pipe line has an expected life of 10 years.

The other parameters of the projects have been identified by the consultant as listed below

1) Volumes build up (in MSCMD)

YEAR	VOLUME	YEAR	VOLUME
1	0.075	6	0.121
2	0.083	7	0.133
3	0.091	8	0.146
4	0.100	9	0.161
5	0.11	10	0.177

2) Sales price of Gas, Rs 8.90 per standard cubic meter (SCM) with an increase of 3% every year.

3) Purchase price of Gas Rs. 7 per SCM with an increase of 3 % every year.

4) Variable costs are assume to be constant throughout the 10 year life of the pipeline @ Rs. 28 lakhs per annum (Consisting of pigging of pipeline, Rs. 20 lakhs ; cathodic protection of pipeline, Rs. 2 lakh, supervision cost, Rs. 3 lakh; pipeline surveys Rs. 2 lakh; and electricity charges Rs. 1 lakh).

Assuming a straight line method of depreciation of material cost of initial capital investment for tax purposes and 12% required rate of return, analyze as a financial consultant, the financial viability of the proposal and make a recommendation to the CEO of the ABC Gas Limited.

Q9 The initial investment outlay for a capital investment project consists of Rs. 100 lakhs for plant

And machinery and Rs. 40 lakhs for working capital. Other details are summarized below :

Output 1 lakh units of output per year for years 1 to 5

Selling priceRs. 120 per unit of output

Variable costRs. 60 per unit of output

Fixed overheads (excluding depreciation)Rs. 15 lakhs per year for years 1 to 5

Rate of depreciation on plant and machinery25% on WDV method

Salvage value of plant and machinery Equal to the WDV at the end of year 5

Applicable tax rate40%

Time horizon5 years

Post-tax cut off rate12%

Required :

(i)Indicate the financial viability of the project by calculating the net present value

(ii)Determine the sensitivity of the project's NPV under each of the following conditions:

(a)Decrease in selling price by 5%

(b)Increase in variable cost by 10%

(c)Increase in cost of plant and machinery by 10%

  t-size:9.0pt; font-family:"Verdana","sans-serif";color:#333333'>2.Mention Six varieties of Fracturing conditions where the "SurgiFrac" services has been applied successfully.(3 marks)

Write down the steps you follow before Stimulating a well. What is the role of a "Petrophysicist"in stimulating a well?(4 Marks)

3. Discuss the Hydraulic fracturing in a Horizontal well. Do you really need to fracture a horizontal well, when you are directly entering into a sweet zone for production optimization?(4 marks)

Give six reasons for degradation of fracture performance in a horizontal well.( 3 Marks)

4.Discuss the Gas production scenario(both historical and future projection ) of US dry gas from the Figure-2, cited in the assignment.(2marks).

Draw the rough sketch of the HBJ and Tripura gas pipeline in our country(3 marks)

Case-2 Assignment no-II

USE OF LASER TECHNOLOGY IN OIL AND GAS WELLS

Drilling an oil or gas well involves the integration of complex technologies. The well is the only conduit to move the oil or gas from the reservoir to the surface. And it must be a conduit that will last at least 50 years and be flexible enough in design to allow for the application of future technologies. To overcome the problems encountered is the biggest challenge during the drilling process and the primary reason for developing advanced drilling technologies. One of the advanced technologies is "Laser Technology".

Lasers can not only be used for drilling an oil and gas well but also for completion operations. Laser drilling has become well established as an economically viable method for producing sub-millimetre sized holes. This article reviews the basics of the laser drilling process and use of lasers for completion operations.

Laser technology applied to drilling and completion operations is attractive because of its potential to reduce drilling time. Lasers cut drilling time by not contacting the rock, eliminating the need to stop and replace a mechanical bit. When using laser technology for perforation, the rock is left cleaner, and fluid flow paths for oil and gas production are damaged less. Researchers believe that lasers have the potential to penetrate rock 10 to 100 times faster than conventional boring technologies and are a huge benefit in reducing the high costs of operating a drill rig. Other potential benefits of using a laser include the creation of a melted rock wellbore lining. This can eliminate the need for steel casing, and improve flow performance, if used as a perforator.

Origin

The earliest studies of laser drilling were in the 1960s and 1970s, but these were primarily theoretical. Physical tests by the laser technology were limited and low power was available at that time.

But then Gas Research Institute (GRI now the Gas Technology Institute) resurrected the idea of using lasers to drill oil and gas wells in 1997, when the institute initiated a two-year study to determine the feasibility of using the high power lasers developed by the U.S. military as part of the Reagan-era Star Wars Defense Initiative.

Those first steps investigated the interaction of lasers with different rock lithologies as the first step toward determining the energy required to remove rock with laser beams. "The study began in earnest when the Star Wars effort was winding down and some in the industry realized these big, high-powered military lasers could provide sufficient power to blast through rock," said Claude B. Reed, with the Argonne National Laboratory. "So GRI, along with the Colorado School of Mines, got access to two military lasers and ran some initial tests."

A revolutionary method for using laser beams to drill oil and gas wells moved a step closer to reality in the laboratories of the Colorado School of Mines. 
The university announced it has acquired six laser technology patents from Boeing in a major step forward in the transfer of military laser uses to civilian applications. If the adaptation of technology borrowed from Reagan-era "Star Wars" military programs is successful, it will mark the first fundamental change to rotary drilling techniques since the concept was invented in Britain in 1845. Laser s can slice through rock like a hot knife through butter, Graves said ( a professor of petroleum engineering at Mines) they would be much cheaper, much faster and much more environmentally benign than conventional drilling rigs.

Graves said, Laser drilling would have several advantages over conventional drilling :

-- Costs could be at least 10 times lower and up to several hundred times less than wells drilled with rotary rigs. For example, a typical, 10,000-foot gas well in Wyoming's Wind River Basin costs about $ 350,000 to drill. Laser drilling would drop that cost to $ 35,000 or lower. 
-- A laser drill's "footprint" -- the amount of surface space it occupies -- could be as little as 100 square feet, or even less with some models. 
-- The laser rigs could be transported to drilling sites in one semi-trailer load. Conventional rigs take up several thousand square feet of space and require numerous truck trips to haul equipment. 
-- Laser s could drill a typical natural- gas well in about 10 days, compared with 100 days for some conventional wells. 
"You're looking at three months of disruption versus a week or so of disruption with a laser drill. 
-- Laser s could be programmed for precise well diameters and depths. In addition, they could alternately drill coarsely to deliver mineral samples, finely to vaporize rock and leave no waste materials, or with intense heat to melt the walls of well bores, thus eliminating the need to place steel casing in wells.

GTI's initial study showed clearly that current laser technology is more than sufficient to break, melt or vaporize any lithology that may be encountered in the subsurface, and that the amount of energy required for spalling, melting or vaporizing rock was significantly overestimated by previous industry sources. For the most powerful laser experiments, as much as 6 pounds of rock were removed in about 4 seconds. In addition, it was found that the energy required to remove and alter the rock varies as much within lithologies as between them. Quantitative results as to minimum power required to remove rock or of factors that control power requirements were not determined. Other observations from these experiments related to cutting ease and speed, as well as altering rock properties. It was observed that calculated penetration rates for all the rock samples except salt were faster than rates observed by most conventional rock-removing mechanisms. Although not performed under in-situ conditions, it was clear that the cutting of hard rocks with close grain-to-grain contact was accomplished more easily than more porous rocks.

In addition, the thermal energy from the laser beam introduced some fundamental changes in rock properties. For example, the porosity and permeability of the rock surrounding the lased hole in a Berea sandstone sample actually increased.

Also, the experiments indicated that at such high powers, there were harmful secondary effects that increased as hole depth increased. These effects included the melting and remelting of broken material, exsolving gas in the lased hole, and induced fractures, all of which reduced the energy's efficiency in rock removal and therefore the rate of mass removal.

Current perforation techniques have remained the industry's primary method of wellbore perforation. An explosive force of shaped charges, originally designed for anti-tank weapons in World War II, focuses a penetrating, small-diameter jet through casing and cement into the reservoir rock. Although an instantaneous process, significant damage usually occurs to the formation. High power lasers could provide an alternative perforation method to reduce or eliminate formation damage, resulting in a significant boost in production rates, cumulative production and overall economic returns. GTI has repeatedly demonstrated through the application of high-power lasers to rock samples that damage to permeability and porosity of the adjacent zones can even be enhanced rather than damaged. By applying this technique down-hole, perforations and other directionally controlled completion and stimulation methods could be employed without damaging the reservoir.

A laser drilling system may provide some unique benefits:-

Ø Higher penetration rates and the ability to drill nonstop surface to total depth will likely reduce the total actual drilling time.

Ø The ability to create a tough, ceramic sheath in the borehole while drilling may reduce or eliminate the time required for setting steel casing in the well.

Ø Since the system has a permanent, hard-wired connection from the surface to the bottom-hole assembly, additional wires and/or optical fibers can be added to the bundle. This will allow the addition of many formation sensors, including televiewers and other imaging capabilities, delivering information to the surface in real-time and at incredibly high data transmission rates.

Ø The combination of the casing and sensing capabilities will eliminate the time required to run tools in and out of the hole, and will significantly reduce the time required for other activities.

Hence, it was found that high temperatures induced by lasers on rock samples could enhance porosity and permeability. High temperatures have been shown to evaporate or otherwise alter cementation minerals creating additional, connected pore space within the affected region. This result in improved conditions for the fluid to flow from the formation into the wellbore, as compared to the damage created to the rock through conventional applications of rotary drilling and explosive perforations.

Questions:-Answer all questions.

1. Discuss some unique benefits a "Laser Drilling System" will provide as compared to the conventional Rotary Drilling.(8 Marks)

2 "It was found that high temperatures, induced by Lasers on rock samples could enhance porosity and Permeability"; Do you agree with the statement? Justify your answer. (8 Marks)

3. When you are using the Laser technology in drilling a Gas well, what control do you have in the event of a Blow out? How do you mitigate it? (9 Marks)

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