Quantifying the Tangible Value of a Smart Field Asset Implementation Leveraging on Digital Technology and Automation, Taking into Account the Intangible Value Element

The value calculation for a new digital and innovative technology is often requested by the executive management to justify the cost required for the implementation and maintenance of the technology. The value is normally segregated into a tangible and intangible value that correspond to a quantitative and qualitative description of those value elements. As part of the Digital Oilfield (DOF) assessment, the solution value has been defined using two approaches. Firstly, qualitative value is described using a "FEATURE_BENEFIT_VALUE" model. The qualitative value elements have been grouped to align with the company strategic pillars to achieve its vision. Secondly, the quantitative value has been estimated using an NPV model. It estimates the value of the complete digital solution (combined investment for all domains) being proposed for the Asset. The model estimates the net present value (NPV) of the expected Asset investment in digital enablement and digital capability as defined in the assessment report. Net cash flow graphs are also calculated. The approach used is to calculate an NPV for a GO-NOGO decision. Therefore, a conservative estimate of NPV is made with the mind-set that if even being conservative, the NPV clears the company's hurdle rate for such projects, then the decision to invest is undertaken. Sensitivity analysis has been performed using conservative estimates of production gain enabled by digital and conservative oil prices. The paper will detail out the approach for the value quantification of a DOF solution that will also correspond to the industry guidance. Example on how the value is calculated will also be outlined.

The Discount Rate Used in the Current Expected Credit Loss Standard Creates Accounting Losses Where There Are No Economic Losses

The Current Expected Credit Loss (CECL) Financial Accounting Standards Board (FASB) standard that goes into effect for major banks in 2020 contains a serious conceptual error. Using the contractual rate rather than the hurdle rate (the competitive rate on a loan for which there is no expected loss) as the rate to discount expected cash collections gives rise to accounting losses where no economic losses exist. This can have a profound effect on required capital and hence lending, especially in economically depressed episodes.

Real Effects of Tax Uncertainty: Evidence from Firm Capital Investments

This paper examines whether tax uncertainty can alter investment decisions, focusing primarily on the timing of large capital investments. Empirically, we exploit the staggered implementation of Schedule UTP, a discrete policy change expected to increase tax uncertainty, finding that, on average, firms responded by delaying large capital investments. This effect is stronger among firms at which the policy treatment is particularly germane, that is, for firms with more material UTBs or with low-to-moderate quality public accounting information. We also test the underlying mechanism, finding that managers buffer against higher tax uncertainty with cheaper sources of financing (cash) and that the investment effect is concentrated among financially constrained firms. The results show that Schedule UTP also reduces the sensitivity of investment to growth opportunities (investment-Q sensitivity) in line with a higher hurdle rate for firms facing higher tax uncertainty. This paper was accepted by Brian Bushee, accounting.

Project Valuation: Price Forecasts Bound to Discount Rates

For their appraisals, most companies use discount rates that account for timing and riskiness of projects. Yet, especially for commodity projects, discounting future cash flows is generally at odds with the assumptions in a company’s hurdle rate. With a multitude of technical and market uncertainties, inconsistent assessments lead to biased valuations and poor investment decisions. In this paper, we consider price forecasts and discount rates in an integrated framework. We calibrate the risk premiums in a two-factor stochastic price process with a capital asset pricing model-based discount rate. Together with the analysts’ long-term prices forecasts, the suggested method improves consistency in valuation and decision making.

XVA metrics for CCP optimization

Based on an XVA analysis of centrally cleared derivative portfolios, we consider two capital and funding issues pertaining to the efficiency of the design of central counterparties (CCPs). First, we consider an organization of a clearing framework, whereby a CCP would also play the role of a centralized XVA calculator and management center. The default fund contributions would become pure capital at risk of the clearing members, remunerated as such at some hurdle rate, i.e. return-on-equity. Moreover, we challenge the current default fund Cover 2 EMIR sizing rule with a broader risk based approach, relying on a suitable notion of economic capital of a CCP. Second, we compare the margin valuation adjustments (MVAs) resulting from two different initial margin raising strategies. The first one is unsecured borrowing by the clearing member. As an alternative, the clearing member delegates the posting of its initial margin to a so-called specialist lender, which, in case of default of the clearing member, receives back from the CCP the portion of IM unused to cover losses. The alternative strategy results in a significant MVA compression. A numerical case study shows that the volatility swings of the IM funding expenses can even be the main contributor to an economic capital based default fund of a CCP. This is an illustration of the transfer of counterparty risk into liquidity risk triggered by extensive collateralization.

CAPITAL BUDGETING ANALYSIS OF INVESTMENT PROJECT FEASIBILITY IN PT INTEGRA INDOCABINET TBK

This research is a case study conducted in one of the property companies in Sidoarjo, East Java, namely PT Integra Indocabinet Tbk ,. Based on secondary data, PT Integra Indocabinet has increased sales and profits from 2014 - 2018. Therefore, the owners want to expand their expansion by adding new factory facilities so they can get more optimal profits and can increase exports abroad. The research aims to provide assistance in the form of suggestions for decision making between feasible or not worthy of the investment carried out. Based on the calculation, obtained an NPV value of 195,510,594,699 ≥ 0 which means it is feasible to run, an IRR of 22%> hurdle rate (10%) which means it is feasible to run; Payback Period is 4 years 3 months> 5 years which means it is feasible to be implemented; The Profitability Index is 1.98> 0, which means it's worth running. The results of the analysis show that using Capital Budgeting techniques can be seen that investment decisions for expansion are feasible.

Capital Budgeting Analysis Of Investment Project Feasibility in PT Integra Indocabinet TBK

This research is a case study conducted in one of the property companies in Sidoarjo, East Java, namely PT Integra Indocabinet Tbk ,. Based on secondary data, PT Integra Indocabinet has increased sales and profits from 2014 - 2018. Therefore, the owners want to expand their expansion by adding new factory facilities so they can get more optimal profits and can increase exports abroad. The research aims to provide assistance in the form of suggestions for decision making between feasible or not worthy of the investment carried out. Based on the calculation, obtained an NPV value of 195,510,594,699 ≥ 0 which means it is feasible to run, an IRR of 22%> hurdle rate (10%) which means it is feasible to run; Payback Period is 4 years 3 months> 5 years which means it is feasible to be implemented; The Profitability Index is 1.98> 0, which means it's worth running. The results of the analysis show that using Capital Budgeting techniques can be seen that investment decisions for expansion are feasible.

Implications for Growth

Without policy measures to offset the negative impact of the bonus culture, investment, productivity, and growth are likely to remain depressed. Given the slow growth of the working age population, the UK’s trend growth rate will thus be 1 per cent and that of the US 0.87 per cent, unless productivity improves. An alternative method of estimating US trend growth from the value data for tangible capital stock provides a slightly better rate of 1.1 per cent per annum. The prospects for the UK and US are so poor that policy measures to stimulate growth are vital. All growth is the result of changes in either TFP or NTV, so one or other must improve to avoid stagnation. There is no way to improve the former, but changes in NTV can be brought about through a lower hurdle rate, which requires the damage from the bonus culture to end.

The Bonus Culture Has Raised the Hurdle Rate

The rise in the hurdle rate shows a change in management behaviour caused by the preceding change in incentives. Following a dramatic rise in US CEOs’ salaries and bonuses in the decade to 2000 there have been no significant changes since. This change in incentives had the usual effect, with a natural time lag, of changing behaviour. The benefits for management that come from improving short-term profits have risen sharply compared with the longer-term benefits from corporate investment, which are unchanged. This has discouraged investment in a similar way to a rise in the hurdle rate on equity. These incentives are much stronger for quoted than unquoted companies and it is for the former that the weakness of investment has been most marked. This provides additional evidence of the bad impact on the economy that has been caused by modern management pay systems.