Economic evaluators of petroleum industry projects have long sought after a single, comprehensive valuation criterion by which investment opportunities could be properly screened and ranked. Recently, Seba has advocated, as captioned in his paper's title, that the present value ratio (or discounted profit to investment ratio, DPR) is " The Only Investment Selection Criteria You Will Ever Need". Many would agree that because DPR is a measure of both the magnitude and the time-distribution of the return, and because DPR can be computed using a discount rate reflecting the appropriate cost of funds or average opportunity rate, it is singularly the most comprehensive valuation criterion available.

However, the screening and ranking of competing investment projects on the basis of DPR is, in fact, a comparison that utilizes a per-dollar-of-investment-capital basis. Though this is certainly not incorrect, it is not always preferred. Often, it is desired instead to compare investment opportunities on a per-unit-of-product basis. Industry managers, particularly, seem to invariably pose questions regarding acquisition cost per barrel or finding cost per barrel.

This paper defines a new valuation criteria, Discounted Profit Per Barrel (DPB), that is shown to be as comprehensive as DPR, while maintaining a per-unit-of-product basis. It is demonstrated that DPB will always be directly proportional to DPR, yet will always have a ranking behavior that is unique. In addition, it will be shown that utilizing DPB instead of DPR at lower discounting rates can prevent duplicity in the economic analysis.

You can access this article if you purchase or spend a download.