This document explores an oil investment project in Argentina. We will provide a capital management analysis using discount rate calculations that account for the project be in a foreign country. Additionally, we will explore the NPV and IRR for this project. Lastly, we will submit our recommendation. This document explores an oil investment project in Argentina. We will provide a capital management analysis using discount rate calculations that account for the project be in a foreign country. Additionally, we will explore the NPV and IRR for this project. Lastly, we will submit our recommendation. Exxon-Mobile
The Argentina Project
The Argentina Project
Exxon-Mobil Mobil (XOM) is a long established major energy conglomerate. Exxon-Mobil produces, transports, and sells crude oil and natural gas throughout the world. They distribute their petroleum products and petrochemicals globally via their infrastructure; the diversity of Exxon-Mobil is demonstrated by their involvement in the generation of electrical power. Exxon-Mobil continues to search for yet untapped fields of natural resources, and engage in the development and marketing of petrochemicals and the resulting byproducts. Exxon-Mobil is the worlds’ largest integrated oil company. Exxon-Mobil currently has 45 refineries in 25 different countries. Exxon-Mobil provides fuel to almost everything in the world. In 2005 year end, the company’s equity was just over $111 billion. Every oil company mainly uses the capital asset pricing model, also known as the CAPM to find out the cost of equity. Exxon-Mobil’s stock markets and bond markets can be at risk depending on how low they are in debt. Most investments in money will be low for large international companies but high for small companies. Exxon-Mobil’s Balance sheet ending in December 2005 fiscal year, ended with $208,335 million total shareholders’ equity and liabilities. Exxon-Mobil’s income for fiscal year 2003-2005 increased each year. During 1987 – 2005 Exxon-Mobil’s Nominal Oil Prices and real Oil Prices, gradually increased from 1987 to 1990, then decreased from 1991 to 1998. In 1999 Nominal Oil Prices and Real Oil Prices started to increase more, and going up each fiscal year from 2003-2005. Exxon-Mobil’s net change in cash increased constantly in 2003 – 2005. Exxon-Mobil takes on some of the world’s toughest energy challenges. Exxon-Mobil sells more than $600 million gallons of fuel each day. Exxon-Mobil conducts business in many foreign currencies. Our analysis for this project is to evaluate the investment based on the long-run optimal capital structure of the business. Argentina is an emerging market, because of this fact the evaluation of this project must take into account additional variables such as oil price fluctuations, political unrest, infrastructure concerns. The initial investment $130M must be weighed against the annual cash flow discounted with the cost of capital in order to make a prudent decision whether the investment should be accepted or rejected. In an emerging market such as Argentina the cost fluctuations in oil must be taken into account. As the cost of oil fluctuates it will affect the NPV or cash flow (positive or negative). As long as the discounted cash flow remains positive regardless of the price oil the project will remain viable. Over the next few pages, we want you to consider whether investing in a drilling opportunity in Argentina is a prudent investment. We will explore with you the risks and benefits involved in this capital management decision. As you consider making a decision regarding the investment opportunity that Argentina presents, we have calculated the discount rates for the potential investments. These rates represent the risk that you are taking with making this investment. Unlike using a risk-free rate for calculating potential future profits, we understand that there are inherent risks involved in...
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