Category: Financial / Legal / Administrative / Political

Assets are deducted in a different manner throughout their lifespan. The main methods of are:
• Direct line amortization (constant annual amortization)
• Surplus amortization (direct line amortization calculated for the surplus value of the asset each year)
• Amount of remaining years (the ratio between the number of remaining years of the asset and the number of years that the asset is due to be used)
• Production units (equity cost of the equipment, after amortization of the accumulative amortization and of the remaining value, multiplied by the ratio between the total annual production and between the remaining recoverable reserves at the outset of any particular tax year.

IRR is the discount rate at which the net present value (NPV) of future cash flows from a capital investment equals zero. Capital expenditure is the primary factor in determining a market’s IRR, along with incentives and operating expenses. Put simply, it provides an apples-to-apples metric for investors to compare demand and project growth across disparate markets.

In a competitive market with no excess profits, the IRR will equal the risk adjusted discount rate.

If a project has an NPV greater than zero, the project creates value and should be undertaken. One can provide in a gas project the breakeven gas price (BEP), which represents the gas price needed to ensure that a project’s NPV is zero, and as such that it is the price needed for the project to be value neutral. If the realizable price is above the BEP, then the project will create value and should be pursued. If not, then the project would destroy value and should not be undertaken.

In the calculation of investments for offshore oil and gas drilling in Israel, economists often take a risk adjusted discount rate of 9%. Insofar as the IRR applies to rate of return on a project, it is sometimes referred to as the project internal rate of return

See depletion allowance

With the objective to encourage equity investment the local Government sometimes grants tax holidays to investors. For instance, the Government of Burma offers a 3 year tax holiday on income tax. This benefit provides an advantage to companies that invest in that it accelerates the profits from the project. On the other hand, the state must take care from not over-using this mechanism in order to attract investors.

The concept here is to allow a company to carry forward losses from one year in order to offset tax obligations in the following years, usually 5 to 7 years forward until the benefit (past losses) are no longer relevant