Case Analysis: Project Evaluation in Emerging Markets: Exxon Mobil, Oil, and Argentina Case Solution

CAPM (Capital Asset Pricing Model)

The Formula of CAPM (appendix 3) has been derived from the Lessard approach, the reason behind using this approach is that the company will be following a combination of the oil market and Argentinian market beta and the Lessard approach helped to derive the CAPM as per the company’s desire and it will also provide the most appropriate results. The final answer of the CAPM is 8.195% which is the cost of equity but the same rate will be used for the discounting as, the company is having only 3% of debt in the total capital composition and it will be taken as an unlevered company while the CAPM will be used as WACC.

Output or Feasibility of the Project, Sensitivity Analysis

Finally, the output or the feasibility of the project has been calculated (appendix 4) by using the inputs or data. It has been identified that the company having net cash flows ranging from -90 million in the first year to 41 million in the last year, while the discounted cash flows are showing the same balance of -90 million while they are also showing a positive balance of 73 million almost in the last year of analysis. Furthermore, the project is giving an IRR of almost 36% which is a good feasibility indicator while the NPV of the project is almost 73 million which indicates that the project is able to give almost 73 million in its overall life after discounting (in real terms). This also indicates that the project is wonderful having a lot of profitability potential. The payback period of the initial investment after discounting is less than 4 years and finally, the project has a capital efficiency of almost 81%.

Simulation of Feasibility

Moreover, by using an optimistic approach, several factors havebeen simulated using a simulation table to identify the future prospects of the project. These factors include Price, revenue, Net profit, EBITDA, EBIT, tax, NPV and IRR. Findings suggested and reveals that the project will become more profitable if the prices of oil increase (appendix 5).


It can be seen form the decision criterion that the project is quite feasible and having a lot of profitability potential the company should invest in the project as, the prices of oil are increase and it is expected that these prices will increase persistently.


Appendix 1


Assumptions Unit Value
Price $/bbl 58
Corporate tax rate % 35
Risk-free rate % 4.4
World-market risk premium % 5
Argentina’s yield spread 5
Oil industry beta 0.69
Argentina’s beta 1.1

Appendix 2


Data inputs Unit Value
Wells No 100
Production rate per well mbbl/yr 10
Investment 130
Drilling $m 70
Processing & shipping $m 60
Operating expenses $/bbl 7

Appendix 3

Computations and Working

Capital Expenditures 2006 2007 2008 2009 2010 2011
Drilling $m                    (70)                     –                –                –                –                –
Processing $m                    (60)                     –                –                –                –                –
Total Capex $m                 (130)                     –                –                –                –                –
P&L Estimation
Production mboed                1,000              1,000         1,000         1,000         1,000         1,000
Price #                      58                    58               58               58               58               58
Turnover $m              58,000            58,000      58,000      58,000      58,000      58,000
Opex $m              (7,000)            (7,000)      (7,000)      (7,000)      (7,000)      (7,000)


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