Treasury and Risk Management - Assignment Example

Treasury and Risk Management The costs and benefits of a project usually get analyzed CBA are usually calculated over a period of time. This is because the outcome of a project occurs over time. However, due to economic factors, the value of the project may be altered due to things such as inflation. Therefore it will not be realistic to estimate an actual value of a project. For that reason, to estimate the value of the current project you discount to the present value. This is in consideration with the current prevailing economic situation. In order to calculate the value of the ore extraction, the following formula will be used. PV=F/ (1+r) n. Where Where,          PV = present value F = future value of cost or benefit in monetary terms are = the rate of discount n = no. Of periods under consideration (e.g. Years) The future value of our project is estimated at $500,000 The number of periods to through the project are 5. Therefore the project value at 16% will be: 500,000/ (1+16/100)5 = 500,000/1.165= 500000/2.1= 1,050,170.82 The present value of the project stands at $1.15 million dollars over the five periods of exploration. Based on the estimated value of the initial costing of capital, I do not think it will be profitable to undertake the ore extraction (HOWELL, 2007). The cost of exploring the ore’s initial capital stands at more than half of the profit that the project will yield. This is not lucrative based on the fact that the prevailing economic conditions are bound to change. When such a project is to be explored, there are a myriad factors that need to be put into consideration. This include other conditions and political risks such as expropriation. Expropriation refers to the use of private property for public reasons. When such a case occurs, it is pertinent that the affected members be appropriately compensated. It is also essential that the will of the owners of the land be served (BRINK, 2004). However, in such conditions many of the land owners are usually mistreated by the government hence tarnishing the name of the explorer. This will in turn affect them politically in terms of popularity and international relations. Therefore if expropriation will be avoided or stands at low percentages, then it will be okay to proceed with the ore extraction. However, if the percentage are large, then it will not be good to proceed with the project. In a meeting to discuss expropriation, I would be glad to invite major stake holders to the project. This will involve a representative from the US government and that of the Mexican state government to discuss the issue. There shall be also the head of the company that is contracted to undertake the exploration and a representative of the people in the area of exploration. The data and information necessary for such a meeting will include documents to sign on the agreement of certain terms by the parties. There must also be data on past expropriation experienced noticed in the Mexican government so as to justify the cost of the same. Based on the above information, it will be appropriate to estimate the political risk of expropriation. This will be arrived at based on the percentage that is likely to be expected. This will be obtained from the secondary sources of data based on the past explorations. If there will be no compensation when expropriation occurs, then I cannot approve the project The rate of 5% to 7% of expropriation without compensation will not be healthy for the ore extraction. This is because it will tarnish the political view of the country. I would also like to consider converting the Mexican peso to expected cash flow rates. Bank borrowing and its advantages over other borrowing modes Bank borrowing or a loan refers to a debt by evidence through a note which specifies the amount lent, the interest and the time for its repayment. In a loan the borrower receives an initial amount of payment refers to as the principle, which is usually replayed in a much later date. Loans are usually given by banks and other great financial institutions. Syndicated loans These are types of loans that enable the collection of funds from different financial facilities to be channeled through a single facility. A structuring bank is usually involved in outsourcing the rest of the funds. An agent bank is in charge of coordinating the funds that are lent to the client. The main reason why the syndicated loan seems to be better than bank borrowing is that there a myriad sources of funds hence there is no need to concentrate funds towards a desired asset. In addition to this, through an agent bank, the borrower enjoys a greater agility and flexibility in the negotiation and operation of the credit facility. This is because it represents that bank which stands as the syndicate. Euro banknotes Euro notes refer to a legal tender in the form of a bank note that can be used in exchange for goods and services within the European zone. The supply of the euro notes is controlled by the European central bank, therefore controlling the monetary policy so as to maintain stability. It also refers to a debt security with a maturity period if less than a few years and is traded within the European currencies (HUDSON, COLLEY & LARGAN, 2000). The good thing about the euro note to bank borrowing is that it can be issued in more than one country in which it is traded. Euro commercial papers The euro commercial papers refers to an unsecured short term loan that is issued by a bank or corporation in the international market and is usually dominated by a currency that differs from that in which the bank resides. Tis is advantageous over domestic bank borrowing in that it can be issued in any currency from any international bank. Euro medium-term notes Refers to a flexible medium-term debts that are issued and get traded outside the Canada and the United States. These usually demands a fixed dollar payments and are usually offered continuously rather than once. The good part of euro medium-term note is that it is issued to even the foreign market for capitals. International bonds This refers to a loan that is issued to a country by a non-domestic institution. They are usually given to countries outside the United States using their local currencies. These are advantageous because the countries will not suffer exchange rates. References HOWELL, L. D. (2007). The handbook of country and political risk analysis. East Syracuse, N.Y., PRS Group. BRINK, C. H. (2004). Measuring political risk. Aldershot, Ashgate. TULLER, L. W. (1994). High-risk, high-return investing. New York, J. Wiley & Sons. BUCKLE, M. J., & THOMPSON, J. L. (1995). The UK financial system: theory and practice. Manchester [u.a.], Manchester Univ. Press. HUDSON, R., COLLEY, A., & LARGAN, M. (2000). The Capital Markets and Financial Management in Banking. Chicago, Glenlake Publishing Company, Limited, The. SMITH, A. D. (1992). International financial markets: the performance of Britain and its rivals. Cambridge u.a, Cambridge Univ. PR Read More