FINA 4316 Capital Budgeting Section 101 Spring Semester, XXXXXXXXXX Term Paper Guidelines Type of work: It is an individual work project/term paper. Topic and Procedure: I already discussed the term...

FINA 4316 Capital Budgeting        2
FINA 4316 CAPITAL BUDGETING
Table of Contents
Executive Summary    1
Introduction    2
Literature Review    3
Discussion & Analysis    7
Conclusion    11
References    12
    
FINA 4316 Capital Budgeting
    
Executive Summary
In this paper we will discuss on the capital budgeting decision and its best methods such as NPV, IRR, profitability index and payback period for evaluating the feasibility of the oil and natural gas project in Saudi Arabia. We can observe that there are various methods in capital budgeting used for evaluating is digging well in a specific region in Saudi Arabia will be prudent and will give positive return or not. But there are certain limitations with respect to the each of these methods. Hence, as per the study it was discovered that net present value (NPV) analysis is considered as the best method for evaluating capital budgeting with respect to digging of well for oil and natural gas exploration. Further, these are the method if delivers a positive NPV can be beneficial to the state of Saudi Arabia in the form of generating huge revenue from oil and natural gas exports, creating employment opportunities for the local youths, using the oil and natural gas for generating power for the domestic industries and enhancing the country’s economy. Further, it can help to lower the carbon emission and support the sustainability initiatives for preserving oil and natural gas for the future use.
Introduction
The ultimate objective of an organization is to increase the shareholder’s wealth. Hence, the organizations focus on three decisions which are evaluating the capital structure of the company, making prudent decision with respect to the dividend policies and capital budgeting decisions. According to most financial scholars it’s the organization’s success and its survival depends on the correct investment decisions. This is because an incorrect business or investment decision can have a negative impact on the best finance policy of the organization. On the contrary, a prudent capital budgeting decision can help to maximize the wealth of the company as it requires substantial resources and long-term commitment. Hence, it is a long-term investment process which is aimed towards consistent wealth maximization of the owner. Further, capital budgeting decisions are used in financial management and is one of the crucial components used in the corporate finance literature.
Literature Review
Saudi Arabia is known as the typical petrostate. It has grown since 1990 in terms of economic growth. The population of the country grew from 16.3 million in 1990 to 32.9 million as of 2017. Hence, the population of the country is very young and most of the population are painstaking labor and are of working age. The elite class of the country rules the oil companies and it is this part of the population which enjoys a high standard of living. The state is entirely dependent on oil exports. Further, there are various challenges faced by the oil producing nation in terms of administration of the expenditure of the states as well as providing employment to the growing workforce of the country. The social cost of oil in Saudi Arabia is estimated to be priced at $80. Further, the energy used per capita is high while the cost of energy is been subsidized. There are sufficient domestic gas reserves in Saudi which are used in the generation of power. Approximately 41% of the oil is used for power generation in 2017 in Saudi Arabia which has resulted in rise of carbon emissions. As per the NGO Action Climate Tracker it has been evaluated that the Nationally Determined Contribution of Saudi Arabia is critically insufficient (R. Cherif, F. Hasanov, A. Pande, 2017). Hence, it is essential that Saudi Arabia must implement capital budgeting decision with respect to technological innovation for utilizing the oil reserves in the efficient manner. This will help the country not only to generate wealth but also to reduce carbon emission.
The management must be cautious while allocating the limited resources in various competing opportunities. This critical decision of allocating the resources i.e., oil and natural gas in a prudent manner by the Saudi Arabia government is called capital budgeting decisions. Assessment of the capital budgeting proposal is the part of the investment decision in the oil and natura gas companies (Arnold & Hatzopoulos, 2000). It is an allocating decision which involves critical capital apportionment. While conducting capital budgeting decisions with respect to the oil and natural gas there must be analysis of the worth of each opportunity concerned with the project in terms of the size, timing and the future cashflows. Further, taking a capital budgeting decision for exploring the potential oil and natural gas fields is highly risk taking. Yet it is very important as energy is one of the driving forces which regulates and activates the economy. Although the oil and natural gas industry in Saudi Arabia is demanding and profitable yet there lies huge uncertainty in terms of exploration and production. There are certain costs associated while exploration of the oil and natural gas. These are costs associated with the drilling of oil and gas, ejection force, trap size, migration development costs and reservoir properties. But, should the investors stop financing the oil and natural gas in Saudi...