Submitted by: Submitted by tofu16
Views: 432
Words: 376
Pages: 2
Category: Business and Industry
Date Submitted: 10/23/2012 03:04 AM
To : Directors, BG Group
From : Corporate Financial Consultant
Date : 12/09/12
Subject : Appraisal Report on Investment Proposal
Introduction : This appraisal is to evaluate the feasibility of the investment and the proposal submitted. Exploration and drilling gas is a risky business proposition, hence, it is crucial to invest wisely.
Investment Appraisal : Both Net Present Value (NPV) and Expected Monetary Value (EMV) are used to evaluate the estimated returns and attractiveness of this investment opportunity. These valuation methods are commonly used in the business world today.
In the NPV calculation, it is not stated clearly which discount rate is used. This makes it difficult to compare with the company’s Weighted Average Cost of Capital (WACC) or hurdle rate. WACC considers the capital structure of company whereas hurdle rate considers minimum acceptable rate of return.
In this business, it is inevitable to make initial large cash outlay to purchase machinery and build wells. Therefore, other investment criterion such as Discounted Payback Period (DPP) can be included as it determines the time period required before the project turns profitable. DPP also considers the time value of money unlike Ordinary Payback Period (OPP). However, it should be noted that both OPP and DPP ignore any cash flows after the cut-off period.
Economic Modelling : A sensitivity analysis should also be included for both NPV and EMV to better reflect any changes in the assumptions and acceptable volatility before a decision is made.
Other externalities that might occur such as environmental issues, health hazards, reserve and commodity price risk should be considered; and how the company can overcome the issues while operating within its ethical guidelines and budget.
Portfolio Considerations : The proposal lacks a mention of company’s risk and rewards appetite and how this investment fits into its current investment portfolios.
Additionally, the proposal has not...