economics · cashflow
Net Present Value (NPV)
NPV = -C0 + CF × [1 - (1+r)^-n] / r
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Inputs
$
$/yr
fraction
years
Description
Computes the net present value of a level annual cash flow, discounted at a constant annual rate over a fixed project life, net of the up-front investment. The standard first-pass economic screening metric for a petroleum investment.
Variables
| Symbol | Unit | Description |
|---|---|---|
| NPV | $ | Net Present Value |
| C0 | $ | Up-front capital cost (drilling, completion, facilities) incurred at time zero, before any cash flow begins. |
| CF | $/yr | A single level (uniform) net cash flow received at the end of each year for the project life — revenue minus operating cost, pre-tax. Not a variable or declining stream (see limitations). |
| r | fraction | Annual discount rate (company hurdle rate or weighted average cost of capital), applied once per year (discrete, not continuous, compounding). |
| n | years | Number of years the level annual cash flow is received. |
Assumptions
- Cash flow is a single uniform (level) amount received at the end of each year for the full project life — not a variable or declining production revenue stream.
- Discounting is discrete/annual (cash flows compounded once per year), not continuous compounding.
- Cash flow and discount rate are both in nominal (current, non-escalated) dollars — no inflation or price-escalation adjustment is applied.
- Cash flow is pre-tax.
Limitations
- Real E&P cash flows from a producing well are rarely level — they typically decline with production. For a genuinely variable cash flow stream, discount each period's cash flow separately outside this tool rather than relying on this annuity form.
- No income, severance, or ad valorem tax deduction is applied; post-tax NPV will be lower and is jurisdiction-dependent — do not treat this as an after-tax value.
- A single constant discount rate is used for the full project life; risked or time-varying discount rates are not supported.
Use Cases
- → Project screening: Compare mutually exclusive drilling or acquisition opportunities using NPV at a common company hurdle rate.
- → Investment threshold check: Confirm a proposed project clears a minimum acceptable discount rate before capital is committed.
Related Calculations
Region Notes
General
Discount/hurdle rates used in practice vary widely by operator, project risk, and commodity-price environment — often quoted in the 10-15% nominal range for conventional development and higher (15-25%+) for higher-risk unconventional or exploration projects. This tool does not select a rate for you.
References
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