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Pay-Offs and Risks of Capital Investments
The decision of whether an investment project can be accepted or denied as part of a company's growth initiative will involve the ascertainment of the investment's rate of return generated by the project. Nonetheless, the rate of return is influenced by specific factors of the company or project that make the decision acceptable or unacceptable. For instance, when we talk about a charitable project, most often it is not approved by the rate of return, but rather on the desire of the business to foster good will and contribute by giving back to the community. Through capital investment decisions, managers of a particular organization create accountability and measurability to determine the long-term economic aspect of the project and the project's financial profitability (Baker & English, 2011).
An example of an investment capital made by an organization was when Exxon Mobil, acquired XTO Resources. The acquisition of one of the largest natural gas companies by the world's most major oil company was estimated at $41 billion. The decision of the company to acquire XTO Resources was a capital investment decision and Exxon Mobil, in the process, made a huge financial commitment. Nevertheless, the company...
Thereby, it managed to position the company to focus on growth opportunities in the arena of natural gas. For Exxon Mobil, the acquisition has profound effects on the company's future projects consideration and evaluation for many years that follow.
The pay-off that Exxon is going to encounter will be to ensure that the investment made payoff for the time and energy used in acquiring the asset. The other payoff likely to be faced by the project will be in finalizing the transfer documents, which requires the help of lawyers and hence, Exxon will need to ensure that it clears its debt with the relevant people. Exxon can also decide to issue new equity or use its retained earnings to help the company pay off its outstanding debt (Mikesell, 2014).
Exxon Mobil's project is likely to face risks such as the proliferation of regulations that are related to health, environmental, and safety matters, plus potential labor unrest. These risks will increase the risk profile of major capital projects like the one for Exxon Mobil. Macroeconomic changes are risk factors that are not within Exxon's control, and therefore, a slight change in oil prices significantly…
Reference List
Baker, K. & English, P. (2011). Capital Budgeting Valuation: Financial Analysis for Today's Investment Projects. Hoboken, New Jersey: John Wiley & Sons.
Mikesell, J. L. (2014). Fiscal Administration: Analysis And Applications for the Public Sector (ninth Ed.). Boston, MA: Wadsworth.
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