Separate cash flow valuation – applications to investment decisions and tax design

Magne Emhjellen and Petter Osmundsen

International Journal of Global Energy Issues, 2011, vol. 35, issue 1, 43-63

Abstract: Oil project assessment using separate cash flow valuation (Jacoby and Laughton, 1992; Laughton and Jacoby, 1993; Emhjellen and Alaouze, 2002), presumes that the present value of the cost cash flow of oil projects can be calculated using a risk free rate. This paper examines whether this practise, at least to a first approximation, is reasonable. More specifically, the paper examines whether labour wage hours costs and steel prices – as cost factors in the investment cost stream – are systematic risk factors (i.e., have a beta different from zero). The paper also investigates whether oil price as a factor in the revenue stream is a systematic revenue factor. Separate cash flow evaluation has been discussed in relation to petroleum taxation. A petroleum tax commission in Norway stated that tax reductions due to depreciation should separately be discounted by a risk free rate. We discuss the role of partial cash flow discounting in tax design.

Keywords: separate cash flows; corporate finance; project valuation; tax design; tax structure; investments; investment decisions; cash flow valuation; oil project assessment; labour wages; labour costs; steel prices; risk factors; oil prices; petroleum taxation; Norway; tax reductions; depreciation; risk free rate; partial cash flow discounting. (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (3)

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