Discounted cash flow rate of return polynomial equations sometimes result in several values of the roots. Only one of these values can be used to accurately characterize the venture, and concern about this prompts a new approach to the problem. Simulation approach evaluates the risk-weighted rate of return which determines the proper range of values. The range of values is then used to estimate the cash flow with probabilistic sensitivity analysis. This analytical technique will determine a valid rate for high risk oil ventures. Simulation method is very easily applied with a microcomputer, and the computer speed has made this approach possible. In addition, spreadsheet and graphic application programs can be used to display the cash flow rate of return and help the decision-making procedure.

Keywords:
application, initial investment, random number, investment, modeling & simulation, reserves evaluation, reserve estimation, probabilistic sensitivity analysis, histogram, iteration
Subjects:
Reservoir Simulation, Reserves Evaluation, Asset and Portfolio Management, Information Management and Systems, Project economics/valuation
Copyright 1986, Society of Petroleum Engineers
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