A Short-Cut Method For Determining Present Worth Of Future Income And Rate Of Return On Investments In Oil-Producing Properties
Authors: Garies Donald F. 
Published: December 2007

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Abstract
The procedure described herein provides a simplified solution to the problem of evaluating investments in oil producing properties by the discounted cash flow method. Long year-by-year calculations, trial-and-error solutions for the rate of return on the investment, and "after Federal Income Tax" calculations are eliminated by the short-cut procedure. Computation time for the entire discounted cash flow calculation is thus reduced to about 5 min. where graphic accuracy is acceptable, or to about 20 min. where more precise answers are desirable. The widely accepted assumption of interest compounded annually at mid-year is retained, and the answers are therefore - within certain limits of accuracy - equal to those produced by conventional, "long-hand" calculations.
An interrelationship established between the rate of return, payout, and profit-to-investment ratio is shown by the short-cut method to provide a basis for grading investments according to more meaningful, positive terms such as "excellent", "good", "fair", etc. The effect of errors in cost estimates is shown to result, for practical purposes, in the rate-of-return concept's losing its meaning at rates exceeding about 100 per cent/year or in cases where the economic life is less than about three years. Finally, a procedure to replace the "dual" rate-of-return concept is briefly described.
While the short-cut procedure is primarily geared toward evaluation of drilling prospects, it can be used in any case wherein the discounted cash flow concept applies, including the case of gas wells. Furthermore, portions of the procedure can be adapted to a wide variety of minor economic problems that heretofore have commonly been neglected due to the long calculation procedure involved.

Introduction
In recent years, the discounted cash flow method of evaluating investments in oil producing properties has gained wide acceptance in principle. The conventional solution, however, has not been so widely accepted because of the long calculations involved. Most major oil companies have resorted to the use of computers or alternate solutions to accomplish the objectives of the conventional solution.