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The company drilling this well is a non-integrated company that is currently producing more than 1,000 bbls/day of other production. Assume the company has had other income against which to utilize all deductions when incurred (expense scenario, NO LOSS FORWARD) and this will continue to be the case point forward. The property was acquired two years ago for a lease bonus of $1,500,000 and the company spent $2,550,000 last year (year -1) on intangible drilling costs that took the well to the point of completion. At that point, the company made the decision to delay completing the well. For all of the data above assume the company will take (or took in the case of sunk costs) all qualified deductions beginning in the year the costs are incurred, with a half-year convention for the amortization of the geological and geophysical cost. For the tangible completion costs assume you will use 7-Year MACRS instead of bonus depreciation. Well reserves are estimated at 900,000 bbls and have been categorized as a proven resource. Use a 25% combined state and federal tax rate for ALL years of the model. Calculate the after-tax cash flows (ATCF) for the sunk cost periods -2 and -1 along with the point forward ATCF for time zero and years 1 and 2. Time period -2 and -1 are sunk costs, and should not be used in economics except for remaining tax deductions that will impact the time zero and years 1 and 2 ATCF. No economics are requested, the problem allows you to practice computing the appropriate ATCF only.

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