Pioneer Petroleum

Project 1 embedded risk can be assessed by evaluating the market risk, success/failure rate of the project.

6. How should you value a project in a line of business with risk that is different than the average risk of your firm’s projects?

The auditors did not appropriately assess the risks discussed in part (A) discussed above. CNB auditors were not in a position to recognize that the firm did not fully own some of the assets in Powder River Petroleum International Inc.'s balance sheet. They used audit assistants in their standardized audit programs and hence failed to take into account the specific audit risks for each engagement.

Chevron is a publicly traded company on the New York Stock Exchange. Their stock symbol is CVX. Chevron is in the business of oil and gas and was founded in 1984 as the Chevron Corporation. Chevron’s headquarters is in San Ramon, California and they serve on a multinational level to over 180 countries world wide. This makes Chevron the fourth largest petroleum company in the world. In 2015 Chevron had grossed revenue of about 130 billion dollars with a net income of 4.58 billion dollars. John S. Watson currently serves as the chairman and C.E.O. of the Chevron Corporation and he also sits on the board of directors.

BP (British Petroleum) was founded well over a century ago by William D’Arcy who invested his savings in the hunt for oil in the Middle East. After several years of drilling, D’Arcy’s money and patience were about to run out, when oil was found about 1,200 feet down. This changed the outlook for the company and D’Arcy became a rich man (Thorne, p. 587 2014).

The Pacific Oil Company went into negotiations with Reliant Manufacturing, and its goal was to sign a new long-term agreement. Pacific assumed that the new contract would be signed with no major obstacles, and that the principal point of negotiation would be price. Jean Fontaine, who is the marketing vice president for Pacific, went into a negotiation process with Reliant. Fontaine started the process three years before Reliant Manufacturing’s current contract was up, hoping to best his competition by offering Reliant a lower price and getting them to agree to a five year contract extension. Fontaine did not adequately research his

Therefore, projects with expected return below 7.02% should be rejected if we only recommend a single and solitary hurdle rate. If doing so, we would ignore the difference between business line and probably accept projects with too higher risk relative to its comparable or reject projects with appropriate risk in its business.

9. The hurdle rate is usually used to classify reasonable investments and a single rate could lead to wrong decisions. Risky investments may appear more profitable as they actually are and less risky projects may appear less reasonable and profitable.

In general, differentiation in hurdle rates between projects with different types of risks is preferable. If all projects with different types of risk will have the same hurdle rates, managers would probably choose the most risky project, due to higher expected returns. This in turn would also drive the divisional beta up. Therefore, it seems to be justified to make a distinction in hurdle rates depending on the level of risk involved. That means that managers also take projects with lower risk into consideration. However, it cannot be said with certainty if the adjustment factors need to be exactly 0.9 or 1.2. Nevertheless, the spread between the adjustment factors should not be too wide, in order not to neglect profitable projects or accept unprofitable ones.

World Petroleum, Inc., is a large, international, publicly-traded energy company currently seeking growth opportunities abroad. Their latest interest is Afrinia, a small nation on the west coast of Africa with largely untapped resources. The area is divided into two sections, both geographically and socioculturally. The southern region is made up of grasslands, populated by the Abani tribe. The northern region is made up of rainforest, populated by the Banu tribe. These regions are joined together by the Afrinia River. The Banu people have always resented those belonging to the Abani tribe. The Abani, having easier access to higher education, quickly assumed the higher-raking government positions and corporate jobs after gaining

The company has invested into many different industries and markets. Each industry’s risk is different and remaining diversified is crucial to obtaining a marginal rate of return. The company needs to use single corporate cost of capital hurdle rates in order to evaluate projects and in order to allocate costs. PPC has integrated so many different industries into their portfolio that it would be best for them to look at each division differently. Their oil division is going to have a higher risk compared to the plastics division. The divisions need to allocate costs according to the risk within that division. The multiple hurdle rates need to be determined to this risk.

The project is sensitized in terms of NPV and IRR that might change as a result of changes in the discount rate and the quality premium (increase in wage). For instance, at a 10% discount rate but the same quality premium NPV is US$64, which is significantly lower

Headquartered in Houston, Occidental Petroleum Corporation is the fourth largest U.S. oil and gas exploration and production company based on equity market capitalization with operations in Middle East, North America, North Africa and United States. Occidental Petroleum or “Oxy” mainly operates through three of its subsidiaries, Occidental Oil and Gas, OxyChem and Midstream and Marketing.

One of the problems with divisional rates, as the advocates for the single rate contend, is that the categories suggested were not helpful in grouping projects by their risk. Although the use of multiple divisional hurdle rates may capture the appropriate discount rate for most projects (given that most projects among the division carry similar characteristics), a more accurate determinant for evaluating projects within a division would be to use multiple discount rates based on individual projects. Assuming that all projects within a division carry the same risk may potentially lead to projects being accepted or rejected in an inappropriate manner. Similar to the case in which one corporate discount rate is used, projects that are riskier than average would be mistakenly accepted and low risk project would be rejected. A situation in which this would occur would be in the volatile tanker industry, which proved to be devastating for many companies in the industry. Under divisional rates Pioneer would evaluate tanker investments under the transportation division, which has a much lower discount rate than is realistic for high-risk tanker investments.

One of the critical problems confronting management and the board of Pioneer Petroleum Corporation was the determination of a minimum acceptable rate of return on new capital investments, The company’s basic capital budgeting approach was to accept all proposed investments with a positive net present value when discounted at the appropriate cost of capital. At issue was how the appropriate discount rate would be determined.