...Pioneer’s cost of equity capital be estimated? 3. What is Pioneer’s weighted average cost of capital? 4. Should Pioneer use a single cost of capital or multiple or divisional hurdle rates in evaluating projects and allocating investment funds among divisions? If multiple rates are used, how should they be determined? 5. Should the discount rate for environmental projects vary by division or be the same throughout Pioneer?1. Does Pioneer calculate its cost of capital correctly? 2. How should Pioneer’s cost of equity capital be estimated? 3. What is Pioneer’s weighted average cost of capital? 4. Should Pioneer use a single cost of capital or multiple or divisional hurdle rates in evaluating projects and allocating investment funds among divisions? If multiple rates are used, how should they be determined? 5. Should the discount rate for environmental projects vary by division or be the same throughout Pioneer?1. Does Pioneer calculate its cost of capital correctly? 2. How should Pioneer’s cost of equity capital be estimated? 3. What is Pioneer’s weighted average cost of capital? 4. Should Pioneer use a single cost of capital or multiple or divisional hurdle rates in evaluating projects and allocating investment funds among divisions? If multiple rates are used, how should they be determined? 5. Should the discount rate for environmental projects vary by division or be the same throughout Pioneer?1. Does Pioneer calculate its cost of capital correctly? 2. How should Pioneer’s...
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...NPV vs IRR NPV is Net Present Value is the present value of the future net cash flows from an investment project, and is one of the main ways to evaluate an investmentIRR - The Internal Rate of Return method is the process of applying a discount rate results in the present value of future net cash flows equal to zeros. NPV is calculated in terms of currency while IRR is expressed in terms of the percentage return a firm expects the capital project to return. The IRR and NPV rules can be used for evaluating projects and more often than not the results are very similar. The NPV method is preferred over the IRR because it calculates additional wealth and the IRR method does not. Whenever there is a conflict between NPV and IRR the correct answer is provided by NPV. NPV is stated as the most acceptable tool to compare alternative investments as compared to Internal Rate of Return (IRR) and payback (Gitman, 2009). The major limitation to the IRR is that it uses one single discount rate for evaluating all its investments and without modification does not take into consideration changes in discount rates which would make it inadequate to be used for long term projects. It uses one single discount rate to evaluate every investment. If the IRR is above the discount rate the project is feasible, if it is below, the project is not feasible. There is however, one possible advantage to the IRR, managers returns managers tend to better understand the concept of returns stated in percentages...
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...going big-bang? (25%) They implemented the system in stages because: * The system was very complex due to the number of divisions involved and the need to implement it world-wide * By using this approach they were able to learn from early experiences and gain quick acceptance from the stages that were implemented first Going with the big bang approach is very risky. If the system fails there is often no way to recover. So, it should only be used if the company must shut down one system and start the other immediately in ALL parts of the company. 3. How did Textronix manage the risks of ERP implementation? (30%) They managed the risks by: * Having a single coherent guiding vision (“Frankfurt is Orlando”) * Creating a global business model * Using the “waves” approach * Using a single software vendor * Providing visible senior management support * Using a steering committee * Making the schedule more important than the budget * Getting the best people involved * Use of code “wrappers” * Making Neun...
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...of interest in comparing potential investments with other possible or existing kind of investments. The method involves dividing the expected profits from the potential investment by the expected expenditure in order to arrive at the rate of return. Evaluating capital investments is an essential task for Johnson Controls Inc. in order to understand the viability of its capital budget before venturing into the emerging markets. Evaluating investments helps the company determine if the investments in question are worthwhile. Johnson Controls Inc. may have many investment opportunities in the emerging market but it must measures the potential of each opportunity preferably in isolation and make comparison of each in order to select the a few or just one that maximizes the value of the firm and reduce the potential risk. For example, Johnson Controls Inc. might be trying to determine if venturing into the emerging market will require buying new equipment or using the existing ones. The company might also be interested in determining if there is need to invest in research and development before venturing into the emerging market with a new or existing product. The company can therefore supplement its traditional methods of evaluating investments (such as payback period) with Net Present Value (NPV) and Internal Rate of Return (IRR) as well as Multiple Techniques. Net Present Value (NPV) The Net Present Value evaluates the investments by analyzing cash flows. The first concept of...
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...Daniel Hughes FINA 450 MID TERM Pioneer Petroleum Corporation Case 2-27-13 Background: Formed in 1924 by a merger of several firms, Pioneer Petroleum Corporation (PPC) is in the business of refining oil, building pipeline transportation and creating industrial fields. Pioneer is currently one of the primary producers of crude oil in the United States and is one of the top producers of Alaska crude oil. PPC is currently the lowest cost refiner on the western side of the globe, and has been expanding capital investments in numerous countries. Pioneer began expanding beyond their current industry into several capital ventures. Some have included vertical investments through the production of crude oil to the marketing of refined petroleum products, and horizontal investment interests into real estate, agricultural chemicals and plastics. However, in 1985 the company was restructured and concentrated on oil, gas, coal and petrochemicals. PPC spends billions in capital expenditures each year and are currently expecting an increase in capital expenditures in the upcoming years. Last year’s (1990) revenues exceeded $15.6 billion with net income over $1.5 billion, and capital expenditures were about $3.1 billion. It is expected that next year’s (1991) will rise to $4.5 billion, with some of these expenditures resulting in more efficient processing of crude oil. Other capital expenditures directly relate to the new standards of government regulations. These capital expenditures...
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...CHAPTER 7—PROJECT CASH FLOWS AND RISK TRUE/FALSE 1. If an investment project makes use of land that the firm currently owns, the project should be charged with the opportunity cost of the land. 2. Net incremental operating cash flow is calculated by adding back the change in depreciation to the change in income after taxes. 3. A key difference between replacement and expansion project analyses is that with replacement, the incremental cash flows are measured as the net difference between projected cash flows from the current productive assets and cash flows of the proposed new productive assets. 4. Empirical studies of risk strongly support the contention that investors who are well diversified focus exclusively on market risk when they establish required returns. 5. Quantification of risk is the easiest part of incorporating risk into capital budgeting; treatment of that calculated risk measure is more difficult. 6. If a firm is considering purchasing an asset whose beta is greater than the current beta of the firm, it should use a discount rate greater than the firm's average required rate of return to evaluate the possible investment. 7. Capital budgeting decisions must be based on the accounting income the project generates since stockholders are concerned with the reported net income the firm generates. 8. A sunk cost is a cash outlay that has already been incurred and that cannot be recovered regardless of whether the project is accepted or rejected. These sunk costs are...
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... Capital Budgeting 2 Capital Budget Processes and Techniques Investment decisions impact the long-term success or failure of a company. The capital budgeting theory assumes that the primary goal of a firm’s shareholders is to maximize firm value. The process of analyzing and prioritizing investment opportunities is capital budgeting. Capital budgeting involves three basic steps of identifying potential investments, analyzing the set of investment opportunities that will create shareholder value, and implementing and monitoring the investment projects that a firm should undertake. Managers need analytical tools to help them make the best investment decisions for their firm. This paper will explore six different methods of evaluating investment projects and their advantages and disadvantages. The six methods are the payback period, discounted payback period, net present value, profitability index, internal rate of return, and modified internal rate of return, which method is most used in business, and issues related to capital budgeting. Capital Budgeting 3 Payback Period The first capital budgeting method is the payback period. The payback period is the amount of time it takes for a given project’s cumulative net cash inflows to recoup...
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...would only be able to by collaboration and coordination among their refining and marketing network divisions. PPC was spending billions on capital expenditures and were expecting an increase in the next year. These expenditures allowed the company to process Alaskan crude oil more efficiently and get a good return while doing so. Since environment standards are chancing PPC will have to meet these new requirements and in order to do so PPC will have to increase their spending. With the new expenditures and the new regulations PPC is expecting an increase in growth because the can capitalize on their strength. PPC managers are weighing out their alternative in order to determine the minimum rate of return. PPC has the decision between a single cutoff rate based on the company’s overall WACC or a system of multiple cutoff rates that reflect risk profit characteristics. PPC approach was to capital budgeting was to accept any investment that shown a positive NPV when discounted at the appropriate cost of capital. Problems Statement: 1. Does Pioneer estimate its overall corporate weighted average...
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...presence in the market * Company’s future success depended on ability of CFO to simplify and restructure operations by selling off unprofitable businesses, integrating new acquired businesses, changing business processes and increasing visibility into operations Initiative Objectives / Benefits Objectives | Benefits | Separate the needs / requirements of each division, but enforce standardization within each division | * Each division would have its own instance of the system for its customer fulfillment process * The requirements of one division would not drive the practices of another * ‘Frankfurt is Orlando’ | Leverage shared services: tie divisions together with central customer registry, consolidated set of books and single item registry | * Each division could provide a global, up-to-date view of financial status * Apples-to-apples comparisons...
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...NT1310 : Project Page 1 PROJECT DESCRIPTION As the project manager for the Cable Planning team, you will manage the creation of the cable plan for the new building that will be built, with construction set to begin in six weeks. The deliverables for the entire Cable Plan will consist of an Executive Summary, a PowerPoint Presentation and an Excel Spreadsheet. You will develop different parts of each of these in three parts. The final organization should contain these elements: The Executive Summary: o Project Introduction o Standa rds and Codes Cable Standards and Codes Building Standards and Codes o Project Materials o Copper Cable, Tools, and Test Equipment o Fiber - Optic Cable, Tools, and Test Equipment o Fiber - Optic Design Considerations o Basement Server Complex Design o First Floor Design o Security and Safety o Component Cost, Picture, and source The Excel Spreadsheet: Component Names Component Descriptions Component Costs Total Project Costs The PowerPoint Presentation: Introductory Slide Component Slides with Component Name, Quantity Needed, Description, Price, Picture, and Reference (where to buy the component) Description of the Basement Telecommunications and Network Server Space Network Equipment Required for the Server Farm Cable Plant Design for the Basement NT1310 : Project Page 2 Standard Floor Desig n for Computers and Network Equipment Cable Plant for the Standard Floor Course Objectives Tested: ...
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...alternatives have been analyzed prior to making costly investment decisions. AoA is an effort to move from the justification for a single alternative to the exploration of multiple alternatives so agencies have a basis for funding the best possible projects in a rational, defensible manner considering risk and uncertainty. As with other decisionmaking tools, techniques, and methodologies, AoA is most effectively used in a higherlevel decision-making context, such as an Enterprise Architecture (EA) framework. In fact, it is doubtful that the higher levels of AoA maturity (see below) could even be considered outside of a higher-level context. What Is AoA? And Why Do It? Analysis of Alternatives is the analytical comparison of multiple alternatives to be completed before committing resources to one project. The practice of comparing multiple alternative solutions has long been a part of engineering practice (Ullman, 2009, especially Chapter 7, Concept Generation). There is, however, a natural human tendency to propose a single alternative for funding or development and justify this option rather than compare multiple options with the goal of choosing the best one. Justification is easier to do than evaluating multiple options and making a learned decision. Thus, government agencies like OMB and DoD have found it necessary to encourage those proposing projects to use AoA. To facilitate this AoA introduction, there are 4 levels of AoA maturity: • Level 0 – Propose one alternative and justify...
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...Marriott Corporation: The Cost of Capital Executive Summary J. Willard Marriott started Marriott Corporation in 1927 with a root beer stand, expanding it into a leading lodging and food service company with sales of over $6 billion by 1987. At the time, Marriott had three main lines of business, lodging, contract services and restaurants, with lodging generating about 51% of company’s profits. The four key elements of Marriott’s financial strategy were managing hotel assets rather than owning, investing in projects with the goal of increasing shareholder value, optimizing the use of debt, and repurchasing their undervalued shares. Marriott Corporation relied on measuring the opportunity cost of capital for investments by utilizing the concept of Weighted Average Cost of Capital (WACC). In April 1988, VP of project finance, Dan Cohrs suggested that the divisional hurdle rates at the company would have a key impact on their future financial and operating strategies. Marriott intended to continue its growth at a fast pace by relying on the best opportunities arising from their lodging, contract services and restaurants lines of businesses. To make the company managers more involved in its financial strategies, Marriott also considered using the hurdle rates for determining the incentive compensations. What is the weighted average cost of capital (WACC) for Marriott Corporation? WACC = (1 - τ)rD(D/V) + rE(E/V) D = market value of debt E = market value of equity V...
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...CHAPTER 8: LOCATION STRATEGIES TRUE/FALSE 1. FedEx chose Memphis, Tennessee, for its central location, or "hub," primarily because of the incentives offered by the city of Memphis and the state of Tennessee. False (Global company profile, easy) 2. Generally, the objective of the location decision is to maximize the firm's profit. False (The strategic importance of location, easy) 3. When selecting a location, service organizations typically focus on maximizing revenue, but minimizing transportation costs is also frequently an objective. False (The strategic importance of location, easy) 4. When innovation replaces cost as a firm's focus for location decisions, the presence of other state-of-the-art firms is a plus, not a negative, for the firm's competitiveness. True (the strategic importance of location, moderate) 5. The ratio of labor cost per day to productivity, in units per day, is the labor cost per unit. True (Factors that affect location decisions, moderate) 6. For a location decision, labor productivity may be important in isolation, but low wage rates are a more important criterion. False (Factors that affect location decisions, moderate) 7. Unfavorable exchange rates can offset other savings in a location decision. True (Factors that affect location decisions, moderate) 8. An example of an intangible cost, as it relates to location decisions, is the quality of education. True (Factors...
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...comparable companies and to lever betas to adjust for capital structure; the appropriate risk-less rate and market risk premium; the choice of time period to estimate expected returns and the difference between the geometric and the arithmetic average as a measure of expected returns. SYNOPSIS Marriott Corporation began in 1927, and over the next 60 years, the company grew into one of the leading lodging and food service companies in the US. In 1987, the Marriott's annual report stated, "We intend to remain a premier growth company. Our goal is to be the preferred employer and provider, and the most profitable company". Marriott's profits were $223 million on sales of $6.5 billion. In April 1988, vice president of project finance at the Marriott Corporation, Dan Cohrs, must prepare annual recommendations for the hurdle rates at each of the firm's three divisions, including restaurant, lodging, and contract services, as well as Marriott Corporation as a whole. The company's restaurants, such as Roy Rogers and Hot Shoppes, provided 13 percent of 1987 sales and 16 percent of profits. Lodging operations included 361 hotels and more than 100,000 rooms, and generated 41 percent of 1987 sales and 51 percent of profits. Contract services provided food and services management to health-care and educational institutions and...
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...THE SUPER PROJECT EXECUTIVE SUMMARY PROBLEMS 1. Is General Foods using the proper capital budgeting methods in evaluating their potential projects? 2. Should General Foods invest in the Super project? In evaluating the Super Project, what are the relevant cash flows to use? In particular: • Test market Expenses • Overhead Expenses • Erosion of Jell-O contribution margin • Allocation of charges for the use of excess agglomerator capacity OPTIONS • Evaluation Methods – NPV, IRR, Payback, Alternative 1, 2, or 3 o Test Market Expenses – Include or Exclude o Overhead Expenses – Include or Exclude o Erosion of Jell-O contribution margin – Include or Exclude o Allocation of charges for the use of excess capacity – Include or Exclude • Accept or Reject the Super Project RECOMMENDATIONS 1. NPV is the best capital budgeting method for evaluating projects. 2. Do not include test market expenses as they are sunk costs. 3. Include only incremental overhead expenses specific to the project. 4. General Foods should account for erosion of Jell-O margin as this reflects incremental costs of the project. 5. Account for allocation of charges for the use of excess capacity as an opportunity cost. 6. Reject Super Project as it has a negative NPV. ANALYSIS Capital Budgeting Techniques The first issue that General Foods needs to address is their capital budgeting techniques. General Foods currently uses ROFE and payback (depending on the type of project) and both...
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