Genesis Energy Capital Plan Report

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Term or Abbreviation Finder

Weighted Average Cost of Capital

Currently Valuable (PV)

NPV stands for “Net Present Value.”

Payback Period (PBP)

IN – Investing in the beginning

The Executive Summary

Making the right choices about which initiatives or investments to undertake typically requires extensive analysis of potential returns on investment. However, a corporation must first determine the appropriate source of cash before making such expenditures. To make the following judgments, we need frameworks from the area of financial management. As a result, the best investment projects that Genesis Energy Company may pick will be evaluated using the three metrics of NPV, PBP, and IRR.

Introduction

By calculating the weighted average cost of capital (WACC), which integrates the many capital sources of a firm, the optimal source of capital may be determined. Once the optimum cost of capital has been established, capital budgeting follows” (Jorgenson & Yun, 2001). As part of capital budgeting, numerous investment possibilities are analyzed and evaluated. In order to assess and rate the feasibility of each option, NPV, PBP, and IRR are employed. Genesis Energy has employed the aforementioned strategies for capital planning.

Capital Investment Report for Genesis Energy Plan

The PBP NPV and the IRR are two of the many metrics used to assess an investment. Some of these techniques involve the notion of the time worth of money, while others do not (Knott, 2004). An investment’s net present value may be calculated by discounting its predicted future returns. An investment’s breakeven point may be calculated using the projected future cash influence.

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See if there are any discounts available. Calculation WACC

WACC is used to calculate the cost of capital of a company by proportionately assigning different weights to various sources of capital. This approach evaluates all sources of capital of a company which includes shareholders equity, preference shares, long-term debt, bonds, and debentures among others. WACC calculation involves multiplying the weights of each item that is contributing to the capital structure with the cost of capital. Companies usually have varying capital structures mainly composed of equity and debts.

Genesis Energy has a total debt of $ 1.7 million whereas the amount of equity capital is $2 million. Therefore, the total capital of Genesis at $3.7 million. The proportion of debt capital, in this case, is 46% whereas the percentage of equity capital is 54%. The cost of equity finance incurred by Genesis is 2%. On the other hand, the cost of debt finance stands at 6.59%. WACC uses these weights to estimate the average capital cost of Genesis.

The proportion of obligation * cost of the obligation= Weighted cost of the financial obligation (Jorgenson & Yun, 2001).

Weighted cost of debt=6.59*46%= 3.03

Weighted cost of equity capital = 2*54% = 1.08

WACC is derived by getting the total of all the weighted costs calculated above.

WACC=3.03 + 1.08= 4.11

The weighted average cost of capital for genesis energy is 4.11%.

Metrics Used

The three identified methods of measuring investments are ranked according to their appropriateness. Net present value (NPV) will be given the priority (Moloney, 2014). For a project to qualify, it must have a positive NPV failure to which it will be automatically rejected. The project will rank as per the NPV with the highest coming first. The project to be picked in this approach will be the one with the highest NPV.

The internal rate of return (IRR) approach will then follow. IRR will help us identify the rates of return for each project. The investment with the highest IRR is deemed to be most viable (Busch & Ferrarini, 2017). The rate of return is also used in calculating NPV. The payback period method will get the last.

Recommendations

The above metrics will guide the selection of the project to be implemented by Genesis capital. Three key factors will be considered. These include the facility, the equipment as well as the inspection. The recommendations are further elaborated down below.

Facility

Project A requires an initial investment of $2000. Project B requires an investment of $2500. Finally, project C requires an initial investment of $3000.The calculation for this approach will be calculated for ten years. The calculations of NPV are broken down in table 1 below.

Table 1: The Use of NPV Approach

Project Description

NPV

Project A- 25 emp facility

1303

Project B- 40 emp facility

3323

Project C- 75 emp facility

4595

By applying the NPV project, C is recognized as the most desirable.

Table 2: The Use of IRR Approach

Project Description

IRR

Project C-75 emp facility

16.75

Project A-25 emp facility

10.45

Project B-40 emp facility

14.97

By applying the IRR approach, project C will be the most viable investment for Genesis energy.

Table 3: The Use of the Payback Period Method

Project Description

PBP in years

Project A- 25 emp facility

Eight

Project B- 40 emp facility

Seven

Project C- 75 emp facility

Seven

These criteria show that project C and project B have a shorter payback period of seven years. This period is the time that Genesis capital will take to recover its initial investment for each of the projects.

Equipment

Genesis Energy is considering three different levels of equipment to invest in this. These types of equipment will be referred to as equipment 1, 2, and 3. Each category of equipment has different specifications.

Equipment 1

Equipment 1 has three different variations. These variations include manual, automatic, and semiautomatic. The NPV, IRR, and PBP are outlined in the table below.

Table 4: The Breakdown of NPV, IRR, and PBP of Equipment 1 for Each Variation

Equipment Type

NPV($)

IRR (%)

PBP(years)

Automatic

2081

17.95

6

Semi-automatic

1630

19

6

Manual

2638

33.35

5

From this analysis, the manual equipment has the highest NPV of $ 2683, the highest IRR of 33.35% as well as the shortest PBP of 5 years. The automatic equipment has an NPV of 2081, PBP of 6 years and an IRR of 17.95%. Finally, the semi-automatic equipment has an NPV of 1630, the highest IRR of 19% and PBP of 6years.

From these findings, the manual equipment is the most viable equipment for genesis to invest in.

Equipment 2

There are two variations of equipment two which include the standard and topline. The PBP, NPV, and IRR are broken down in the following table.

Table 5: the NPV, IRR, and PBP of equipment 2

Equipment type

NPV($)

PBP (years)

IRR (%)

Top of the line

4932

6

28.87

Standard equipment

2436

5

28.02

The top of the line equipment qualifies based on the metrics of NPV and IRR but it takes more time to recoup its initial investment than the other equipment. The top of the line equipment has a more PV of $4932, a higher IRR of 28.87%, but a longer PBP of 6 years. The top of the line equipment will, therefore, be the most preferable and will be selected for the investment.

Equipment 3

This level of equipment is to be analyzed based on person-hour requirement. There are three different options to be considered, which includes a two-man machine, three man-machine as well as five man-machine.

Table 6: The Breakdown of NPV, IRR, and PBP of Equipment 3

PBP(years)

IRR (%)

NPV($)

Equipment type

Breakeven point not attainable

-4.15%

-267

2 Man Machine

Breakeven point not attainable

-13.28%

-413

3 Man Machine

Breakeven point not attainable

-3.55%

-289

5 Man Machine

The machines under the third category of equipment all have a negative NPV. The IRR of all the equipment is also negative. The items of equipment are also not able to meet the initial investment cost as observed that they are unable to break even. This shows that they lack viability as the investment and other subsequent costs outweigh the expected cash inflows (Busch & Ferrarini, 2017).

All machines in this category fail the viability test, and therefore, none of them should be picked.

Inspection

Inspection is an important aspect of Genesis Energy’s operations. The mode to be used for inspection can either be in-house or by contract. The initial investment cost for in-house inspection is $1800 whereas a contract inspection has no initial investment cost. These two options are analyzed in table 7 below.

Table 7: Comparison of in-house inspection vs. contract inspection

PBP (YEARS)

IRR (%)

NPV ($)

INSPECTION MODE

6

21.83 %

2,604

In-House inspection

Beginning of inspection

721

Contract inspection

If the company needs value it should select the contract inspection, but it will yield greater returns, it also has an infinite IRR. The PBP of the contact inspection method is at the beginning of the inspection exercise.

Total Investment Cost

After analyzing each of the above aspects, the investment options that are most viable and should be implemented by Genesis Energy have been identified. This combination is summarized in table 8 below.

Table 8: Combination of selected investment options

NPV ($)

IRR (%)

PBP (years)

Initial investment ($)

Combination of selected investment options

5258

22.46%

6

7050

The selected combination will have a total investment cost of $7050. The combined NPV is $5258, a payback period of 6 years and an IRR of 22.46%.

Conclusion

An investment activity for any company is usually a capital-intensive exercise that requires informed decision-making. There is also a degree of risk involved which has to be compensated for by reasonable returns. The major approaches that have been used for evaluation of the investments of Genesis energy include IRR, NPV, and PBP. The investment options identified include the use of facility C because it maximizes value and has a higher return, manual equipment one because it has the highest net present value.

References

Busch, D., & Ferrarini, G. (ed.) (2017). Regulation of the EU financial markets. Oxford, UK: Oxford UP

Jorgenson, D.W., & Yun, K.-Y. (2001). Investment. Cambridge, MA: MIT Press.

Knott, G. (2004). Financial management. Basingstoke, UK: Palgrave Macmillan.

Moloney, Niamh. (2014). EU securities and financial markets regulation. Oxford, UK: Oxford European Union Law Library.

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