If Venerus implements the suggested methodology‚ what would be the range of discount rates that AES would use around the world? * 12% discount rate was used for all projects * Venerus felt that this model worked fairly well * In 1990s this model of capital budgeting was exported to projects overseas * model became increasingly strained with the expansions in Brazil and Argentina * because hedging key exposures such as regulatory or currency risk was not feasible
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the assumption that they will be able to receive the dividends fully denominated in US Dollars without any loss in value. Does this make sense as a way to do capital budgeting? The following reasons make Venerus’ model superior to the traditional model of capital budgeting used by AES. 1. Venerus has used 3 main parts to measuring his cost of capital in the new methodology. Broadly they are‚ the overall risk (systematic)‚ the country specific risk and the project /(cash-flow) specific risk. This
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1. On one half a page review what does our traditional finance framework and the CAPM model‚ for example‚ have to say about risk? What is it? How is it approached? The traditional finance framework uses discounted expected future cash flow to determine the NPV of the project. The amount of the opportunity cost is based on a relation between the risk and return of some sort of investment. People are rational and adverse to risk and need incentive to accept risk. The incentive in finance comes in
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Budgeting at AES In June 2003‚ Rob Venerus‚ director of the newly created Corporate Analysis & Planning group at The AES Corporation‚ thumbed through the five-inch stack of financial results from subsidiaries and considered the breadth and scale of AES. In the 12 years since it had gone public‚ AES had become a leading independent supplier of electricity in the world with more than $33 billion in assets stretched across 30 countries and 5 continents. Venerus now faced the daunting task of creating
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GLOBALIZING THE COST OF CAPITAL AND CAPITAL BUDGETING AT AES 1. How would you evaluate the capital budgeting method used historically by AES? 2. If you implemented the methodology suggested by Venerus‚ what would be the range of discount rates one would use around the world? 3. Does this make sense as a way to do capital budgeting? 4. How big a value difference does this new approach make to the Pakistan project? 5. How do these cost of capital modifications translate into changed probabilities
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AREC 550 homework 7 Globalizing the Cost of Capital Budgeting at AES Chia yun ‚Tsai(Debbie) 2013/3/22 The reason why Rob Venerus used the cost of capital concept to improve upon what AES had used in the past for a discount rate is because the old model always used the same discount rate for the model. However‚ with electricity generating businesses around the world‚ the old model started to cause some problems. In the past‚ AES used the same cost of capital for all of its capital budgeting
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Agency Cost d. Multilateral Financial Institutions 2) Disadvantages a. Projects V/S Division b. Complexity c. Macroeconomic Risk d. Political Risk: 2. If Venerus implements the suggested methodology‚ what would be the range of discount rates that AES would use around the world? If Venerus and AES implement the suggested methodology‚ the projects would change while WACC changes. To find WACC we must first calculate the leveraged bets for each the US Red Oak and Lal Plr
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Case 3: Globalizing the Cost of Capital and Capital Budgeting at AES Question 1 Explain and comment on the capital budgeting method used historically by AES. Is there a need for change? Explain. Question 2 If Venerus implements the suggested methodology‚ what will be the adjusted discount rate for the Red Oak project (USA) and the Lal Plr project (Pakistan)? Question 3 Calculate the effect that a revision of its cost of capital will have on the Lal Plr project’s NPV. Comment on the
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implications of using sovereign spreads and idiosyncratic risk factor to evaluate international projects. Suggested Questions 1. How would you evaluate the capital budgeting method used historically by AES? What’s good and bad about it? 2. If Venerus implements the suggested methodology‚ what would be the range of discount rates that AES would use around the world? 3. Does this make sense as a way to do capital budgeting? 4. What is the value of the Pakistan project using the cost of capital
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Globalizing the Cost of Capital and Capital Budgeting at AES (Case Analysis) AES Corporation AES was founded by Roger Stan and Dennis Bakke in 1981 after the Public Utility Regulation Policy Act (PURPA)‚ which created a market for independent power producer. In 1980s‚ the company experienced rapid growth in United States and went into public in 1991. From early 1990s‚ AES began to explore offshore markets and made remarkable success. In the 12 years since it went public‚ AES has hold more
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