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BP PROJECT & VALUATION

BP Project & Valuation



BP Project & Valuation

Introduction

British Petroleum follows and operates number of projects in the pipeline. The nature of their project involves huge duration in our case investment will be done in 2012, operations will commence after 5 years and the project goes on till 2050. Initial project out lay include $4 billion.

Project Valuation Techniques

Net Present Value (NPV)

Definition

NPV is a capital budgeting technique based on the techniques of discounted cash flow (DCF). It is a method for evaluating proposals for capital investment by obtaining the PV of net cash flows in the future, discounted at the cost of Capital of the company or the required rate of return (Brounen, 2004, Pp 71-101).

Description

The techniques of discounted cash flow (DCF) are methods to evaluate investment proposals that employ concepts of the value of money over time, two of these are the NPV method and the method of internal rate of return. For the implementation of this approach comes from the following (Chase, 2003, pp. 1753-1763):

Determine the PV and each cash flow, including many inflows as output, minus the capital cost of the project.

Add up discounted cash flows determined in the previous step, this amount should be defined as the projected NPV.

If Net present value is positive, project should be executed, while if in case of negative NPV, it should be rejected.

If the 2 projects are equally mutually exclusive, one with the highest NPV should be selected, provided that the NPV is positive.

Internal Rate of Return

Definition

IRR is rate of return which is earned by the project or investment. It is calculated by finding the discount rate where the net investment of the company is equivalent to the total PV of all cash flows that is Net Present Value = 0.

Descriptions

Internal Rate of Return is another capital budgeting technique which is the growth rate expected to be generated from the project. It is a discount rate at which NPV of the project becomes zero. It is compared with the hurdle rate. The project will be accepted if IRR is greater than the Hurdle rate otherwise it will get disapproved.

Binomial Tree

Definition & Descriptions

Also known as binomial option pricing model, it utilizes an iterative method, which facilitates the order and arrangement of points in time (usually referred to as nodes) during the phase between the investment valuation date and maturity date of option. Especially designed for valuating options and other complex derivatives, this model reduces probabilities of variations in prices, removes the odds for arbitrage, assumes an efficient and perfect market, and shortens the duration of the option. By making the whole valuation procedure easier, it enables valuation of projects and investments at each node in time specified.

Illustration of BP Project Valuation

Cash flow Outlay

Total cash outlay £10 billion spread from 2011-16 in many new projects

Details:

Clair Ridge Project, First phase £4.5 billion

Production Capacity = 640 million barrels from 2016-50

Devenick gas was developed with the estimated amount of £550 million.

Schiehallion and Loyal fields = £3 billion

Kinnoull field = £700 million

Cost ...