Question 4 You are a trained Corporate Investment Analyst. Your client, an oil rig entity, has hired you to research and analyse some methods they can adopt in evaluating oil rig projects. Thus far, they have adopted a simple back of the envelope? or Payback period method in assessing viability of a project. However, for long term projects, they have consistently lost money because cash flow for projects seldom panned out. There must be a better way,' so exclaimed the CEO Alfred Tam. He has commissioned you to submit a report of up to 2,500 words in total and must address: (a) All methods for evaluation of projects. One (1) merit and one (1) demerit of each method. (b) The absolute method still triumphs over the relative method in evaluating investment projects. What does it mean? Explain in the report. Under what situation will both the absolute and relative methods yield the same project investment decision? Determine the risk in cash flow projections. List and describe two (2) ways that such risks can be mitigated. (d) (e) Explain which of the following are relevant cash flow? (1) (iii) (iv) Market explorative survey expenditure Additional cost savings Extra income a project could bring Installation costs Salvage value of machinery to be replaced Tax credit for new equipment (vi) The firm traditionally uses a standard discount rate for all its project evaluation, namely its own banks borrowing rate. Is this appropriate? (30 marks) Question 4 You are a trained Corporate Investment Analyst. Your client, an oil rig entity, has hired you to research and analyse some methods they can adopt in evaluating oil rig projects. Thus far, they have adopted a simple back of the envelope? or Payback period method in assessing viability of a project. However, for long term projects, they have consistently lost money because cash flow for projects seldom panned out. There must be a better way,' so exclaimed the CEO Alfred Tam. He has commissioned you to submit a report of up to 2,500 words in total and must address: (a) All methods for evaluation of projects. One (1) merit and one (1) demerit of each method. (b) The absolute method still triumphs over the relative method in evaluating investment projects. What does it mean? Explain in the report. Under what situation will both the absolute and relative methods yield the same project investment decision? Determine the risk in cash flow projections. List and describe two (2) ways that such risks can be mitigated. (d) (e) Explain which of the following are relevant cash flow? (1) (iii) (iv) Market explorative survey expenditure Additional cost savings Extra income a project could bring Installation costs Salvage value of machinery to be replaced Tax credit for new equipment (vi) The firm traditionally uses a standard discount rate for all its project evaluation, namely its own banks borrowing rate. Is this appropriate? (30 marks)
