Investment and Pioneer Petroleum

open up Petroleum Case I. Statement of Problem As Pioneer Petroleum continues to progress as a company, they argon trying to determine the best counselling to approach a minimum rate of return. As of right now, they have two approaches they can take. The firstborn would be taking a mavin cutoff rate based on the companys overall WACC. The second, rather than a single cutoff, there would be multiple cutoff rates overdue to the risk-profit characteristics. II. Statement of Facts and Assumption Pioneer Petroleums approach to capital budgeting was to only accept investments with arrogant net present value.Currently, Pioneer Petroleum calculated their WACC at 9% shown in Figure 1 below. In calculating their WACC, PPC uses book value weights. When dealing with practicality, it is better to use grocery value weights because it provides what the expectations of the market and the investors have. By using this information, it can show what a company needs to do to gain bare-assed capi tal. III. Analysis Pioneer Petroleum was created after merging with multiple firms causing it to branch out into antithetic markets.With multiple projects, the most effective thing PPC could do is to implement using single corporate price of capital to evaluate their multiple projects. By doing this they can interpret different risk associated with different industries. Pioneer Petroleums other option would be to use multiple cutoff rates, but exit in this direction may not provide the most accurate information since there are many components associated with different industries. IV. Recommendation My recommendation for Pioneer Petroleum would be to use a single cutoff rate and each individual division.It would be wise for them to do this rather than looking at the company as a whole. Not only should Pioneer only invest in projects with prescribed net present value, but they also need to assume the different risks associated with it. Something else they might consider is the le ngth of the maturity for the project. More risk could be found in younger projects and older projects as well. By using a single cutoff rate, they can analyze more precisely how much it volition effect their decisions in the future. Figure 1 WACC = Rdebt(1-TC)(D/V) + Requity(E/V) 9% = . 12(1-. 34)(. 5) + (. 10)(. 5)