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Part II—Executive Summary Presentation

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Introduction

  • Project investment is crucial in maximizing wealth and utilization of resources.
  • However, the decision on the project to undertake should be informed by its feasibility (Baker & Powell, 2009).
  • According, the problem statement in feasibility study of Genesis Energy project investment is which alternatives are optimal in the five projects.
  • Genesis Energy facility expansion project has been informed by the capital budgeting process undertaken.
  • The capital budgeting process has employed the net present value (NPV), payback period, and internal rate of return.

Capital budgeting is instrumental in informing management on the feasibility of the various alternative investments due to its ability of demonstrating the expected returns (Baker & Powell, 2009). Thus, the process has been employed in evaluating the feasible alternatives of Genesis Energy facility expansion project.

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Weighted Average Cost of Capital (WACC)

  • The WACC is one of aspects which has been determined in the feasibility analysis of the five different projects' alternatives.
  • WACC has been employed because the project will be financed by equity and debt finances.
  • Accordingly, the proportion and cost of capital for each source has been considered in deriving the WACC (Brealey, Myers, Allen, & Mohanty, 2012).
  • The applicable WACC for the project has been determined to be 9.43%.

The weighted cost of capital is computed by considering the proportion of the various sources of capital been employed in financing the project. In addition, the cost of capital of each source of finance is included in computing the WACC. Accordingly, the formula employed in deriving the WACC is WACC = (E/V* Re) + [D/V* Rd * (1 – Tc)] (Brealey, Myers, Allen, & Mohanty, 2012).

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Financial Analysis

  • The financial analysis undertaken to determine the alternatives to select has been undertaken by considering the optimal feasibility.
  • Optimal feasibility implies the alternative with the highest return potential (Peterson & Fabozzi, 2012).
  • Accordingly, the various alternatives under each project has been ranked according to their feasibility potential.
  • The table below demonstrates the ranking of the projects.

A project investment alternative should be informed by the return it promises to an investor. Thus, the various investment alternative should be ranked by the value potential.

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Projects' Feasibility Ranking

NPV Feasibility Analysis

  • The NPV approach undertaken determines the discounted return each project promises.
  • This implies the time value of money has been considered in the subsequent cash flows (Baker & Powell, 2009).
  • The NPV feasibility analysis has evaluated the project alternatives discounted returns it will derive in the end of the ten years.
  • Thus, the alternatives have been ranked according to the amount of discounted amount they will derive as reflected in the ranking table.

NPV has the advantage of considering the time value of money because it enable the management to determine if the project will be profitable in future due to inflation which devalues buying power of money(Peterson & Fabozzi, 2012).

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Payback Period Feasibility Finding

  • The payback period approach evaluates the time a project will take to recover the incurred investment cost.
  • Thus, the payback period feasibility analysis undertaken has computed the years each projects’ alternative will take to recover initial investment.
  • The project with the least timeframe is considered the optimal as reflected in the ranking table.
  • The least timeframe is considered optimal because it has less risk of recovering the cost.

The payback period enables the management to determine if the time each project will need to recover the cost incurred is reasonable. Thus, the payback period employed in the feasibility study demonstrates the time each project will recover the initial investment cost.

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IRR Feasibility Finding

  • IRR feasibility approach examines the cost of capital which will derive zero NPV.
  • Thus, an IRR recommends for the project with the highest IRR to be undertaken.
  • The alternative with the highest IRR has been considered in the analysis because it will require highest cost of capital to realize negative NPV(Peterson & Fabozzi, 2012).
  • Thus, the ranking of the various alternatives in the table has considered the size of the IRR percentage.

IRR is vital in determining the optimal investment alternative due to the ability of demonstrating the maximum cost of capital the management should undergo to generate zero net present value.

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Optimal Alternatives

  • Owing to the rationale employed, the optimal alternatives for each project has been selected.
  • The optimal alternatives have been derived through their respective rankings.
  • The alternatives ranked number one are the optimal alternatives which should be selected.
  • Accordingly, the table below demonstrates the expenditure cost of the facility project.
  • Expenditure cost is derived from the initial investment costs.

The NPV, IRR and payback period evaluations have derived the optimal alternatives the management of Genesis Energy should consider. The optimal alternatives are the alternatives ranked first in the ranking table.

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Project Expenditure

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Performance Measure of New Strategy

  • The new strategy selected in expanding the facility of Genesis will require performance measurement in future (Peterson & Fabozzi, 2012).
  • Accordingly, three metrics have been selected in measuring the performance of the new strategy.
  • The metrics revolves on net income, customer perspective, and internal process perspective.
  • The three metrics selected are reflected in the table below

The performance of the strategy employed in expanding the organization’s facility is crucial in determining if it will maximize wealth of the shareholders. Thus, a number of metrics have been considered in determining if the new strategy is viable in the future.

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Performance Metrics

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References

Baker, H. K., & Powell, G. E. (2009). Understanding Financial Management: A Practical Guide. Oxford: Blackwell Pub.

Brealey, R. A., Myers, S. C., Allen, F., & Mohanty, P. (2012). Principles of corporate finance. New York: McGraw-Hill Inc.

Peterson, P. P., & Fabozzi, F. J. (2012). Capital Budgeting: Theory and Practice. Hoboken: John Wiley & Sons.