Capital Budgeting Alternatives Case Study by Nicky

Presents a case study to assess two alternatives for investment projects currently available for the North Sea Oil Company.
# 149974 | 2,460 words | 2 sources | APA | 2011 | US
Published on Jan 16, 2012 in Business (Finance, Investment and Banking) , Business (Management)


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Description:

This paper explains that the extremely competitive contemporary business environment forces entrepreneurs to develop and implement the best strategy to increase profitability thus ensuring survival. Next, the author reviews the case of the North Sea Oil organization, which must choose between two investment projects based on which best supports the organization's goals. To make this decision, the paper relates detailed use of the financial tools of weighted average costs of capital, net present value and internal rate of return alongside capital rationing constraint. Tables, and formulas and calculations for each situation are included in the paper.

Table of Contents:
Introduction
The Situation
Analysis of Investment Projects
Weighted Average Cost of Capital
Net Present Value
Internal Rate of Return
The Selected Investment Project
Summary

From the Paper:

"The Weighted Average Cost of Capital is a crucial element in the analysis of North Sea Oil's investment alternatives for the simple reason that the organization relies heavily on both debt and equity to finance either of the projects. In this order of ideas, the WACC is used to identify the actual costs of the capital used in order to reveal if it is profitable to engage in a given investment project. Investopedia (2009) defines the weighted average cost of capital as the "calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All capital sources - common stock, preferred stock, bonds and any other long-term debt - are included in a WACC calculation. All else help equal, the WACC of a firm increases as the beta and rate of return on equity increases, as an increase in WACC notes a decrease in valuation and a higher risk."
Below is the formula at the basis of the WACC calculation:
"Where:
E = market value of organizational equity
V = E + D
Re = cost of equity
D = market value of organizational debt
Rd = cost of debt
Tc = corporate tax rate
Considering a corporate tax of 15 percent, the Weighted Average Cost of Capital for North Sea Oil's two investment alternatives can be calculated as follows:"

Sample of Sources Used:

  • Yousaf, A.S., IRR, http://www.thinkanddone.com/finance/irr.html last accessed on July 9, 2009
  • Investopedia, 2009, http://www.investopedia.com last accessed on July 9, 2009

Cite this Case Study:

APA Format

Capital Budgeting Alternatives (2012, January 16) Retrieved April 19, 2024, from https://www.academon.com/case-study/capital-budgeting-alternatives-149974/

MLA Format

"Capital Budgeting Alternatives" 16 January 2012. Web. 19 April. 2024. <https://www.academon.com/case-study/capital-budgeting-alternatives-149974/>

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