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The Profitability of the Given Investment - Coursework Example

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The paper presents the selection of a discount rate for use. two major considerations are made as to ways of ensuring that a comprehensive investment analysis method is selected. These considerations are the internal rate of return (IRR) and net present value (NPV)…
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The Profitability of the Given Investment
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Download file to see previous pages Given the 6 projects that have been earmarked by the company, the best form of discount rate that will be preferred would be the Weighted Average Cost of Capital. This is selected against the backdrop that it helps in identifying the cost of working capital available to the company (Muller, 2002, p 36). This is done by way of calculating the individual rates at which the company is expected to execute payment on average to its securities so as to clear or finance its capital assets. The weighted average cost of capital (WACC) is preferred over others as it holds the potential of ensuring that payment of security holders are not done offhand but on an average basis to ensure that the net present value can be measured. In its generalized form, it is important to establish that the optimization of the CAPEX and OPEX are both directed at the generation of capital fund revenue for the company: only that they are to be done in two different fashions. For the 100m CAPEX, any spending decisions made on it must be one that can potentially increase the wealth or value of assets that are already in place and that will become useful beyond the given tax year (Cliff, 2009, p. 83). On the part of the 20m OPEX, it would also be expected to be used in more value for money fashion even though they have to be used to cater for expenses that will be incurred whiles the project is underway (Investopedia, 2012). Given the prevailing background, it is strongly recommended that for the development drilling, both G-3 and G-4 be drilled in 2015. This is because of the collective wealth creation that will accrue from the two wells when drilled concurrently. For example, it is said that the value of G-1 will decline by a percentage rate of 8% per annum. What this means is that if the company would opt for periodic drilling whereby it would consider drilling G-3 alone in 2015 and drilling the G-4 in subsequent years, the quantitative value of well will be reduced. ...Download file to see next pagesRead More
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