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LONDON SCHOOL OF COMMERCE

MB For Executives
Financial Analysis and Management
Capital Investment Budgeting
Yousef Salem Hamad
L0009SBSB0913
Tutor: Pro. S. Lumby 31 October 2013
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Contents
ABSTRACT
..................................................................................................................
2
INTRODUCTION
........................................................................................................
3
B
ACKGROUND
.............................................................................................................
3
Drilling Company
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3
Proposal-1
..............................................................................................................
3
Proposal-2
..............................................................................................................
3
Project Overview
....................................................................................................
3
CAPITAL BUDGETING
............................................................................................
4
I
NVESTMENT
A
PPRAISAL
T
ECHNIQUES
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1

Net Present Value


...............................................................................................
5
2
Accounting Rate of Return
.................................................................................
7
3
Payback Period
..................................................................................................
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4
Internal Rate of Return
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11
C
RITICAL
A
NALYSIS
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13
Q
UALITATIVE FACTORS
.............................................................................................
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CONCLUSION
..........................................................................................................
17
R
EFLECTIVE
P
ROJECT
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18
REFERENCES
...........................................................................................................
20
APPENDIXES
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ABSTRACT

In this project we analysed two machines one supplied by National and


the other byXeng. We evaluated both of them through different
investment appraisal techniques tofind out which is better for us to
purchase. National is a bit expensive as it requires$20 million, while
Xeng requires $15 million. Xeng company also provides
freemaintenance service to their machine.We found out that NPV and
IRR advised us to select National. However, ARR andPayback
suggested to select Xeng. According to different Authors, NPV and IRR
aremore accurate than ARR and Payback.
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INTRODUCTION
Background
Drilling Company
Hamadrill is a Libyan drilling company provides drilling and
workoverservices to the major oil operators in Libya. Hamadrill is going
to invest inacquiring a new fixed asset represented in Drilling package
(Rig) to participatein a project of drilling number of oil and gas wells.
Hamadrill has twoshortlisted proposals; one from National USA and the
other from Xeng China.
Proposal-1
National package costs $20 million having 10 years life with $5 million
salvage value, and excludes any service cost. Hamadrill has an
agreement witha service provider to provide the maintenance services at
$500,000/annum.Hamadrill operation costs is $600,000/year. The
revenue is $5 million/annum.
Proposal-2
Xeng package costs $15 million having 7 years lifetime with no
residualvalue. It includes the maintenance services at no further
expenses. HoweverHamadrill operation costs is $500,000/annum.The
revenue is $4 million/year.
Project Overview
The project is mainly to drill a number of oil and gas wells in Sharara
onshorefield operated by Akakus Oil Operations (Repsol-Libya). This

field is locatedin Murzuq basin where several oil and gas concessions
and fields exist; full ofactivities such as exploration, drilling, production
and workover where thedrilling business is widely promising.Because of
speciality in the nature, this machine will attract all big clients.
Inaddition to the mentioned project, Hamadrill targets to participate in
theforthcoming projects run by major companies such as AGOCO,
BP,Occidental,
and
other
operators. No capital allowance is available from the government. 30%
Tax rate inLibya.
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CAPITAL BUDGETING
Capital budgeting is the process of analysing potential projects, and one
of the mostimportant decisions which managers make. Basically, one of
the main functions ofany financial manager in a large organisation
would be caring of capital budgetingapart from the capital structure and
the working capital management. (Brigham andEhrhardt, 2013).It had
been defined by Charles T. Hrongren
''capital
budgeting
is
a
long-term planning
for making and financing proposed capital outlays
''. Its benefit is obtainedonly in close future, whilst future in uncertain.
Cost minimisation and profitmaximisation is the overall objective.
Careful
planning
and
thorough
analysis
should be adopted when risk is involved, also to avoid over investment. (
Paramasiva andSubramanian, 2009).The
investment decision
(capital budgeting decision) is the decision to acquireasset(s). (Pike and
Neal, 2006).This decision depends on:

Size of cash flow generated from operation

Timing of cash flow

Risk of cash flowAny firm has large number of possible investments that
some of them are valuableoptions and some are not, where the financial
manager should distinguish betweenthem and decide accordingly. (Ross
et al., 2006).One of the biggest challenges face the capital budgeting
process is identifying andcollecting the relative information needed to
perform for analysis. It is worthmentioning that the investment decision
process should consider the compliance between proposed projects and
corporate strategy. (Pike and Neal, 2006).To come-up with the most
proper investment decisions, several techniques are used tomeasure the
corporate intents of investing money. These techniques are known by the
''investment appraisal methods''
.
JOB BOARD

Assistant Professor (tenure track) Sociocultural Anthropologist, Sub-Saharan Africa

George Mason University

Assistant Professor Media and Environment

University of Toronto

Assistant, Associate or Full Professor in Family Health Faculty

University of California, San Francisco

A DV E R T IS E W I TH