Evaluating the Historical Capital Budgeting Method Essay Example for Free

Evaluating the Historical Capital Budgeting Method Essay Currently AES employs Project Finance Framework. Project finance tends to be used in projects with tangible assets with predictable cash flows in which construction and operating targets can be easily established through explicit contract. The key to AES projects financing lies with the precise forecasting of cash flows. In effect, the possibility of estimating cash flows with an acceptable level of uncertainty allows for allocation of risks among various interested parties. The ensuing certainty in cash flows allows for high level of leverage and enables project assets to be separated from the parent company. Let us now take a closer look at the pros and cons of the Capital Budgeting System currently in place. Principal Advantages Non-Recourse The separation of the parent company is structured through the creation of a Special Purpose Vehicle (SPV). This SPV is the formal borrower under all loan documents so that in event of default or bankruptcy AES is not directly responsible before financial creditors. Instead, their legal claims are against the SPV assets. Maximize Leverage Currently AES seeks to finance the cost of development and construction of the project on highly leveraged basis. High leveraged in non-recourse project financing permits AES to put less in capital to put at risk permits AES to finance the project without diluting its equity investment in the project. Off-Balance Sheet Treatment AES may not be required to report any of the project debt on its balance sheet because such debt is non-recourse. Off balance sheet treatment can have the added practical benefit of helping the AES comply with covenants and restriction relating to borrowing funds contained in loan agreements to which AES is also a party. Agency Cost The agency costs of free cash flow are reduced. Management incentives are to project performance. Most importantly close monitoring by investors is facilitated. Multilateral Financial Institutions One of the four constituents that have contractual arrangement with the SPV in a typical project are the banks (an integral part group of financiers that include share holders, insurers, equipment manufacturers, export credit agencies and funds). Among these banks there are multilateral financial institutions (like IFC, CAF and etc). Presence of these institutions as financiers helps in raising capital from these institutes at lower cost and secondly it is also read as a positive sign by commercial banks. Drawbacks Projects V/S Division The company is not only expanding its geographical boundaries, but it is also diversifying its business through backward and forward integration. The current financial model does not provide the AES with the big picture, which now constitutes more number of variables that are being influenced by multiple factors due to the increase in depth and breadth of the organization. Complexity Financing of projects requires involvement of a number of parties. They can be quite complex and can be expensive to arrange. Secondly it demands greater amount of management time. Macroeconomic Risk The current methodology employed by AES for capital budgeting does not take into account the exchange rate risk. This risk will be of higher magnitude in the developing countries because of their unstable monetary and fiscal policies[2]. As we have seen that fluctuation in exchange rate has greatly hurt the AES business and they were unable to mitigate this risk as they haven’t anticipated it. This risk becomes important when the exchange rate fluctuation affects balance sheet items unequally. Thus keeping check on the foreign exchange rate requires timely adjustment of both the items of revenue and expenditure, and those of assets and liabilities in different currencies. Political Risk: This is another important factor which the current financial management system does not take into account. This will be of significant importance when it comes to investing in developing countries where frequent changes in government policies occur. Does this system make sense? The financial strategy employed by AES was historically based on project finance. This approach solely took into account those factors that minimized AES exposure to the project and achieved the most beneficial regulatory treatment thus ensuring availability of financial resources to complete the project. The model worked well for the domestic market as well as for the international operations, provided the opportunities undertook by AES were either in the sector of building and running a power plant or simply buying an existing facility and upgrading it and then operating. The underlying assumption over here was that the symmetrical and asymmetrical risks faced by the project were more or less same irrespective of its geographical location (Refer to Exhibit 3). However when AES started diversifying the breadth of its operations by incorporating other offshoots of energy related business and transforming from a cogeneration to a more utility organization with majority of expansion occurring in developing economies. This diversification of business increased the symmetrical risks like business risk, a classic example of which we see in Brazil where AES experience shortfall in demand /sales volume due to Energy Conservation Policy of Brazilian government and this had a chain effect on debt servicing capacity of the SPV as well the stock price of the parent company. Other factor that current model was not able to include was the risk of devaluation of currency in developing economies which resulted in significant losses due to the inability of the company to survive its international debt obligations. Expansion in developing economies also exposed the business to political risk where the policies change erratically with changes in government. Hence we see that the geographical diversification of business causes asymmetrical risk to increase causing bimodal behavior in the result. Project financing becomes less recommendable as a symmetrical risk becomes more manifest. This constitutes a problem for emerging countries where these risks tends to be at the forefront. Lal Pir Project Valuation Scenario 1: Pakistan In order to calculate the value of project for the Lal Pir project in Pakistan, we first need to calculate the Weighted Average Cost of Capital (WACC) using the new proposed methodology. For this we have followed the approach given in exhibit 8 of the case. The first step is to calculate the value of levered ? using the formula and information given in the case[3]. The value of the levered ? comes out to be 0. 3852 or 38. 52%, which essentially means that our project is not very highly correlated to the market return. Using this value of ? we now calculate the cost of Equity (refer Exhibit 4A). We have used the return on U. S. Treasury Bond (i. e. 4. 5%) as the risk free return in calculating the cost of equity. The cost of equity comes out to be 0. 072 and similarly, using the risk free return and the default spread (given in exhibit 7a of case) we calculate the cost of debt which comes out to be 0. 0807. It is important to note that the cost of debt and the cost of equity also need to be adjusted for the sovereign spread (0. 0990 for Pakistan). Once we have the adjusted costs of equity and capital we can now calculate the WACC for the project using the formula given in case where we essentially multiply equity and debt ratio with the adjusted costs of equity and debt respectively[4]. The WACC in this scenario comes out to be 0. 1595 or 15. 95%. However, now we need to adjust this WACC for the risks associated with doing the project in Pakistan and we do this by using Table A given in the case. We know that the total Risk Score for Pakistan is 1. 425 and since there is a linear relationship between business specific risk scores and cost of capital[5] we need to adjust our WACC by 7. 125% thus making our final WACC 23. 075%, using which we calculate our NPV (refer to Exhibit 6) from the year 2004 to 2023, and it comes out to be negative $234. 34 million. Scenario 2: USA For USA similar calculations are made to calculate the WACC (Exhibit 4B). However there are two things that are different. First we see the sovereign spread is equal to zero. Secondly, in this case we would need to calculate the business risk using the information given in exhibit 7a of the case (refer to Exhibit 5). This score comes out to be 0. 64 and using this score, our business risk comes out to be 3. 23% and adding it to our calculated value of WACC, we get our final WACC of 9. 64%. Using this we calculate our NPV for USA which comes out to be negative $ 35. 92 million (refer to Exhibit 7). Adjusted Cost of Capital and Probabilities of Real Events in Pakistan In calculating the adjusted cost of capital for Pakistan the WACC is adjusted for six common types of risks: Operational, Counterparty, Regulatory, Construction, Commodity, Currency and Legal. We can clearly see from table A given in the case that besides construction there is a probability of all these risks actually effecting the project in Pakistan. In these, the highest probability is that of currency risk and the legal risk. The adjusted cost that we have calculated is adjusted by the total risk score for Pakistan. There is a linear relationship between the total risk score and adjustment to the cost of capital, i. e. a score of 1 leads to an adjustment of 500 basis points in the WACC. When we calculate the WACC for Pakistan through traditional formula it comes out to be 15. 95%, however in order to incorporate the risk factor associated with Pakistan we need to adjust it for the Total Risk Score, which in this case is 1. 425. So we simply multiply this by 500 and we find out that we need to adjust our WACC 23. 075%. Since this 23. 075% is adjusted using the total risk score we can safely assume that it incorporates for the probability of the afro-mentioned six types of risks in WACC with respect to Pakistan. Discount Rate Adjustment: USA v/s Pakistan As mentioned earlier the discount rate is adjusted based on the total risk score of the country. This total risk score is compiled from 6 main types of risks, the probability of which varies from country to country. If we simply compare the risk scores for USA and Pakistan[6], we can see that there is a major difference between the risk profiles of both the countries. For instance, while currency, regulatory and legal risks are significantly high in Pakistan, they do not exist in the USA at all. Also we see that operational, counterparty and commodity risks are higher in USA as compared to Pakistan. Similarly when the respective WACCs of the two countries are adjusted for their risk we see that the adjusted WACC for Pakistan (23. 075%) is much higher as opposed to that of USA (9. 64%), which essentially implies that Pakistan is inherently a riskier country to invest in as opposed to the USA and any investments made in this region would have to cross a higher hurdle rate than if they were made in the US region.

Background Technology in Education :: essays papers

Background Technology in Education If you were to walk into any elementary, middle, or high school, you’ll find that many classrooms are equipped with TVs and VCRs. These devices serve as a teaching aide, not as entertainment. Instructional videos give students a chance to witness the use of tools and strategies they have been learning at school in a practical setting. Some students do not learn well just from teacher, TVs have been known to hold peoples attention for longer spans than one person. Elementary aged students are more vulnerable to TVs than older students. In conjunction with most parents being working class and the family unit becoming disjointed, many educational programs were created to help teach children the basic functions of language, mathematics, reading, and writing. This is the most influential educational technology of the past. Along side of the TV in a classroom you may find cassette play/recorder. The cassette player/recorder has been in schools a little longer than the television. Cassette players are primary sources of foreign language aides. Tapes of people speaking the language of choice were recorded and played back to students. It’s better to have an example of a language spoken than just to see it in a book. That’s why in college if you are taking a foreign language class the book comes with set of language tapes. Many different subjects have applied that same concept of using tapes and cassette players. Books on tape became a popular thing and are widely sold around the United States. Now we have more advanced technologies that are leading us into the future. Modern Technology in Education We are living in the time of the information boom. Never before has information been so abundant and easy to find. To many students it seems like a hassle to search for information on a computer. Could you imagine finding all of your information by flipping pages of books, magazines, and news papers in a library? â€Å"Technology is treated as a tool to help accomplish a complex task rather than a subject of study for its own sake (US Government, 2001).† Computers are an everyday thing for college students in the United States, there is a requirement to be able to use them.The computer is our present and it may be the rest of our future. Most schools are equipped with a computer lab for students to use. From Seseme Street to the Rocky Mountain Learning Systems, there is software for students of all ages.

From your characters point of view Essay

I knew that big Bastard was trouble as soon as I saw him in the office that first day they both arrived on the ranch. When I saw him turned away from me I knew what his sort was like, big guys who thought they owned the place jus’ cos of their size. An’ he didn’t even answer my question, jus’ stood there like a big lump staring at me. I knew they was gonna cause trouble. I heard from the other guys that Lennie was a good worker I give him that but he still was odd, never was with the guys always by himself, with George or with that damn pup that Slim gave him. Carlson always said he never said a word unless George was there or if he allowed it, stupid Bastard. I mean I heard things about guys like that who were big and smart but this guy, Lennie, was different altogether he was almost like a child I didn’t know he was capable of mangling my hand, let alone kill my wife. But you never know looks can be different than what is genuine, you get to know these things when you see these bastards come work and then leave, you see it all the time. Since Lennie first come to the ranch I had a hunch, and when he did what he did to my hand I knew that he was not only mean but he was dangerous. I never told about my hand before, I know what the other guys on the ranch would say, Me, the bosses son being beat up by some guy who couldn’t put two and two together, I Wasn’t gonna let em’ know, I wasn’t gonna let my wife know that her husband got beat up by that Bastard. Them only been on the ranch couple o’ weeks and Slim letting em’ getting away with it, I wasn’t gonna say Nothing. Slim has a way with words, all the guys trust him. So when my hand got busted by Lennie I was real furious, it made me real mad. I was Jus’ looking for my wife when it began I spose, so she has something to do with it, She is always going’ off and when I’m looking for her I could never find her. Not knowing where your wife is can ruin a man. An’ people were sayin’ things about her. Made me wonder I spose so I go looking for her in the barn where it been mentioned she was and Slim said to be in there too. My wife had been looking at Slim for a while so I was mad and made my way to the barn. Slim was there but not my wife, so we have an Argument and it ends up with my hand being busted. I mean what’s a guy spose to think when his wife is looking around at the men? An’ Slim would be what you call a good catch I spose, But that means that he aint no better than me. When I started on him I never thought about what he could do to my hand, he always was so quiet and looked like he could never hurt anything even though he was a big bastard. The look in his eyes when he just grabbed my hand, I had never seen it in a guy before an’ I wont wanna be seeing it again too soon I can tell ya. I haven’t seen a guy so mad before, sure I have got a temper I get mad a lot, but this Lennie was just mental. He jus’ had this look of hate in his eyes, I was angry but for a big guy like that to take advantage of his size is out of order. He had no right to jus’ do that kind of shit to me. He just took hold of my hand and then crushed it within his own palm, the pain was unbelievable and the other guys jus’ stood there watchin’ him do it. Before he fought back I heard George in the background tellin’ him to do it. I knew they travelled together but I didn’t think that that they was that close, I was proven wrong, Lennie always did what George told him to and that time was no exception. His grasp on my hand grew tighter and I was in pain, I couldn’t think about anything else but the feeling in my hand, and what I must have looked like to the other guy’s but then after it got to its worse all I could think about was what would be left of my hand after the big bastard had finished. An’ If only George hadn’t told him to do it, It wouldn’t have happened, he still makes me mad the way he is still here working on the ranch with Slim. I could feel the bones in my hand breaking, I never had thought of pain like that before. My hand still is now messed up. Don’t think it’s ever gonna be the same, and neither is he. As soon as I saw him I had it in for him, but after him mangling my hand I wanted revenge. Things weren’t so good between me and my wife but that was no excuses for her death. The Dumb bastard was out for me too, and he got me, twice. I knew the way he spent all that bloody time with that pup that he was strange, I had warned her about spending time with the guys on the ranch, her being the only woman was dangerous but he was the last guy I woulda thought would take advantage. He never was interested in things like that, he didn’t come to town with us ever, and jus’ stayed in the barn with that pup. I had said for her to stay in the house, but for a woman to do what she is told is something that doesn’t happen easily. I spose it was also her fault stupid bitch going where she aint wanted gettin’ herself into trouble; something was gonna happen sooner or later. The guys was just out in the yard playing horseshoes, I wasn’t gonna join in and be humiliated by them all laughing at my hand. I jus’ sat down an watched didn’t know what was going on else where. The next thing I know old candy is calling from outside the barn saying for us to come quick. She was jus’ there face down on the straw, I had never seen her be so still. But then I thought and knew what had happened, me an’ Slim rushed up to her and Slim jus said she was dead. I knew at once that the big bastard had been in there with that damn pup. I knew it was him form the start, he couldn’t help himself, He wanted to make trouble and this was the last time I was going to be humiliated he had gone one way too far. I wasn’t disturbed by her death really bad, I was jus’ mad with the Bastard I knew it was him an’ I was gonna do something about it. Carlson knew it was him too, an’ I could see it in George’s eyes that he also knew what was going on. I wasn’t gonna let Lennie get away with it either. My wife was a slow bitch but it was Lennie who took her life and he wasn’t gonna get out of this one by the other guys keeping ’em Quiet. I had done that already once, when I could have got him canned, but I didn’t for my pride now he had the life of my wife. But George was his friend, regardless of this he still went looking for him. I was suspicious though, I mean they travelled together and how did I know that he wasn’t gonna help Lennie get away and escape. But I Spose the dumb bastard wouldn’t make it on his own without some other guy helping him out or getting’ him outa shit. When me and the guys saw Lennie lying on the floor next to George I was livid, I hadn’t killed the crazy Bastard myself, I was gonna make him suffer the way I had. I don’t know everything that went on but what I do know is that Lennie was to blame for the death of my wife and my hand was never gonna be the same cos of him being a crazy Bastard. I could see that they were gonna mess things up, an’ I was right.

Meaning and Existentialism in My Life Essay - 677 Words

Existentialism is a phiosophy which revolves around the central belief that we create ourselves. External factors are not important. It is the way that we let external factors affect us that determines who we are. As individuals we all have the freedom to choose our own path and that is what life is all about. Along with the freedom of choice comes the responsibilty of ones actions which can make some people anxious but give others meaning to their lives. To overcome this anxiousness and accept responsibilty is to meet the challenges of life and to truly live it. I can adopt the existentialist approach which states that to live life is to experience happiness and absurdness and to appreciate both as a part of life. There are†¦show more content†¦Ill remind myself that I can help it and I can do well on whatever I set my mind to. Another worry of mine that I hate to admit to myself because I always felt like there is an adventurous spirit locked up inside me, is that I never take chances. I feel like that is also a part of living a meaningful and significant life. To take chances, make mistakes and then learn from them and become a better person.. A worry that I think everyone has is that one day you simply wont be able to handle it anymore. Whether someone gives up on life, an important goal or person, they will be the one who loses; they will be the quitter. An existentialist or any smart person will always say never give up. It is an existentialist belief that fighting for life is living. Life is meaningful when its full of struggles and failures and achievements. When I fight for what I want I am bringing significance into my life.I am setting myself a goal and progressing towards it, whether or not i achieve it, at least I will have the satisfaction of knowing that I tried. The number one rule that I will keep in mind is to stay positive and never give up. Even when Im faced with tough decisions or just having a bad hair day. Ill remember that its all a part of life and deep down inside I would not have itShow MoreRelated Existentialism: Kierkegaard and Nietzsche Essay1126 Words   |  5 PagesDictionary defines existentialism as a chiefly 20th century philosophical movement embracing diverse doctrines but centering on analysis of individual existence in an unfathomable universe and the plight of the individual who must assume ultimate responsibility for acts of free will without any certain knowledge of what is right or wrong or good or bad (Merriam, 2011). In other words, an existentialist believes that our natures are the natures we make for ourselves, the meaning of our existence isRead MoreChapter 30 Thought And Culture During World Wars And Totalitarianism971 Words   |  4 Pageschanged in different forms due to their country s successes of failures. 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As put by Jean-Paul Sartre in his essay Existentialism is a Humanism, â€Å"The other is indispensable to my existence, and equally so to any knowledge I can have of myself,† meaning that one’s existenceRead MoreExistentialism in Camus and Kafka1697 Words   |  7 PagesExistentialism in Camus, ‘the Outsider and Kafkas, ‘The Metamorphosis Franz Kafkas The Metamorphosis and Albert Camus The Outsider, both feature protagonists in situations out of which arise existentialist values. Existentialism is a philosophy that emphasizes the uniqueness and isolation of the individual experience in a hostile or indifferent universe, regards human existence as unexplainable, and stresses freedom of choice and responsibility for the consequences of ones acts. In TheRead MoreExistentialism And Its Impact On Society Essay976 Words   |  4 PagesSartre once said â€Å"man is nothing else but what he makes of himself.† The implications of this statement and his entire school of thought had a profound effect on society as a whole. Sà ¸ren Kierkegaard is often thought to be the first proponent of existentialism but never used the term as a self-describer and was categorized as an existentialist posthumously. Sartre derived his inspiration from Martin Heidegger and embraced the term, but he was hardly the only one to flirt with such thinking. Many philosophersRead MoreEssay The Stranger1275 Words   |  6 PagesThe Stranger In the book The Stranger, the main character, Meursault, is a stranger to himself, and to life. Meursault is a person who is emotionally and physically detached from the world. He seemingly cares only about himself, but at the same time could be concerned little about what happens to him. The title, the Stranger, could indicate Meursaults disconnection and indifference to the world that surrounds him and, therefore, his role as a stranger in the book. The title could also implyRead More Existentialism In Grendel Essay1616 Words   |  7 PagesExistentialism In Grendel The debate between existentialism and the rest of the world is a fierce, albeit recent one. Before the dawn of science and the Age Of Reason, it was universally accepted that there were such things as gods, right and wrong, and heroism. However, with the developing interest in science and the mechanization of the universe near the end of the Renaissance, the need for a God was essentially removed, and humankind was left to reconsider the origin of meaning. John