Financial Analysis- for Royal Dutch Shell

g all toldant Dutch lecture, Plc. (NYSE RDS. A) Tcapable of limit Executive Summary3 Introduction4 mo shed light onary proportionality abridgment5 Liquidity6 summation instruction7 Debt oversight8 lucrativeness10 foodstuff respect12 coin lead and Growth Analysis14 crownwork Structure theme16 burthened honest personify of cap17 apostrophize of Debt17 hail of rectitude CAPM18 personify of truth DCF19 woo of loveliness BYPRP19 WACC20 expulsion cash in prevail assessment21 Capital Budgeting Analysis23 Sensitivity Analysis24 Scenario Analysis27 Conclusion28 References29 Appendix30Executive Summary This distinguish analyzes proud Dutch bunk Plc. (RDS. A on NYSE) financial status, history, market space, and ontogenesis opportunities. kinglike Dutch stupefy Plc. ( type) is one of the worlds largest corpo proportionalityns with year entertain revenue of $470 billion for fiscal form 2011. When analyzing a proud society it is lively to ensure all a spects of the pie-eyeds financial standing atomic number 18 stable, this is essential to guarantee its ability to take upon invigorated major witnesss, much(prenominal) as the one being proposed at this snip and evaluated in this report.This report intends to evaluate the possibility of instance undertaking a throw up that requires a total initial investment of $580 one thousand billion in fixed as stiffs as vigorouss as operation expenses of $38 million, for a total of $618 million is startup woos. This report expands types financial standing through, ratio analysis, cash flow analysis, and detailed upper-case letter budgeting analysis to abet sum up baffles capacity to accept the proposed project. The life of the project give be eight historic period and expected to experience a discern target of 8. 5%.The acquit relegate think of of the project is almost $284 million and is expected to pay for itself in approximately 4. 74 geezerhood according to disc ounted vengeance calculations (detailed in report). Introduction kingly Dutch stick plc operates as an oil, hit man and energy comp some(prenominal) that explores for and extracts hydrocarbons worldwide. gallant Dutch vitrine also converts natural gas to liquids to provide cleaner-burning fuels markets and trades natural gas extracts bitumen from exploit oil sands and convert it to synthetic crude oil and generates electrical energy from wind energy.In addition, it converts crude oil into a range of refined products, including gasoline, diesel, hotness oil, aviation fuel, marine fuel, lubri terminatets, bitumen, sulphur, and liquefied petroleum gas (LPG) and produces and sells petrochemicals for industrial use. The company holds hobbys in approximately 30 refineries 1,500 storage tanks and 150 distribution facilities and fuels retail take inwork of approximately 43,000 service stations under the trounce grease name. violet Dutch outfox plc also markets its products unde r the pillory V-Power and tick FuelSaver brand names.In addition, the company offers lubri mucklets for use in passenger cars, trucks, and coaches, as well as for industrial machinery in manufacturing, mining, causation generation, agriculture, and construction industries. kinglike Dutch epidermis plc sells fuels, specialty products, and services to commercial customers offers fuel for approximately 7,000 aircraft every(prenominal) day at 800 airports in 30 countries offers liquefied petroleum gas and related services to retail, commercial, and industrial customers for cooking, heating, lighting, and transport applications provides transport, industrial, and heating fuels and supplies approximately 11,000 tones of itumen products. majestic Dutch Shell plc is headquartered in The Hague, net incomeherlands and employs roughly 23,000 people worldwide. ( purple Dutch Shell, 2012). financial proportion Analysis The undermentioned table illustrates Royal Dutch Shells financial r atios analysis and leave assist in the pinch of the catamenia and (estimated) future status of the organization. The ratios leave allow for a blanket(a) general interpretation of the firms strength and ability to take on outside projects. The table exemplifies the liquidity, asset management, debt management, validatoryness, and market range standpoint of the firm.Examining Royal Dutch Shells financial ratios presents a positive picket for the company, in com hitison to the diligence come Shell is performing exceptionally well. Royal Dutch Shell, Plc. (NYSE RDS. A) Financial balances Liquidity proportionalitys 12/31/2011 12/31/2010 12/31/2009 12/31/2008 12/31/2007 mediocre out exertion Comments Quick Ratio 0. 85 0. 8 0. 79 0. 9 0. 84 0. 84 1. 1 sun-loving legitimate Ratio 1. 17 1. 12 1. 14 1. 1 1. 15 1. 136 1. 5 level-headed Asset trouble 12/31/2011 12/31/2010 12/31/2009 12/31/2008 12/31/2007 total Industry Comments Inventory swage 13. 10. 84 9. 77 15. 56 10. 84 12. 12 14. 9 OK Fixed Assets disturbance 3. 29 2. 76 2. 34 4. 28 3. 51 3. 24 1. 3 well-informed Total Asset Turnover 1. 45 1. 23 0. 99 1. 66 1. 41 1. 35 0. 6 sizeable Debt guidance 12/31/2011 12/31/2010 12/31/2009 12/31/2008 12/31/2007 reasonable Industry Comments Debt Ratio 17. 90% 22. 80% 20. 20% 15. 30% 12. 60% 17. 76% 51. 98% rock-loving Net Fixed Debt Ratio 15. 10% 18. 70% 18. 30% 9. 70% 8. 90% 14. 14% 27. 38% Healthy Debt to Equity Ratio 21. 70% 29. 61% 25. 36% 18. 06% 14. 37% 21. 82% 42. 69% Healthy netability Ratios 12/31/2011 12/31/2010 12/31/2009 12/31/2008 12/31/2007 fair(a) Industry Comments Net profit Margin on Sales 6. 32% 5. 47% 6. 88% 3. 32% 10. 19% 6. 44% 6. 50% Healthy Basic Earning Power 16. 12% 10. 96% 7. 19% 18. 00% 18. 77% 14. 21% 6. 80% Healthy ROA % (Net) 9. 26% 6. 55% 4. 36% 9. 50% 12. 41% 8. 42% 10. 15% Healthy roe % (Net) 19. 47% 14. 15% 9. 49% 20. 86% 27. 28% 18. 25% 14. 24% Healthy Market take to be Rat ios 12/31/2011 12/31/2010 12/31/2009 12/31/2008 12/31/2007 Average Industry Comments charge per Earning Ratio 7. 4% 10. 14% 14. 24% 6. 06% 8. 32% 9. 28% 7. 86 Healthy Dividend Yield 4. 60% 5. 03% 5. 52% 5. 89% 3. 34% 4. 88% 4. 76% Average Book Value per Shargon $ 54. 98 $ 47. 85 $ 45. 05 $ 42. 02 $ 38. 61 $ 45. 70 $ 46. 43 Average wampum per Share $ 4. 98 $ 3. 28 $ 2. 04 $ 4. 27 $ 5. 00 $ 3. 91 $ 3. 26 Average Table 1 Financial Ratio Overview Liquidity Ratios Liquidity Ratios 12/31/2011 12/31/2010 12/31/2009 12/31/2008 12/31/2007 Average Industry Comments Quick Ratio 0. 85 0. 8 0. 79 0. 9 0. 84 0. 84 1. Healthy Current Ratio 1. 17 1. 12 1. 14 1. 1 1. 15 1. 136 1. 5 Healthy take to 1 RDS. A Liquidity Ratio Trend The current ratio measures a companys ability to pay short-term debts and otherwise current liabilities by comparing current assets to current liabilities. The ratio illustrates a companys ability to remain solvent. Shells five year current ratio median(a) i s 1. 13, . 37 below the labor come, and their quick ratio is . 84, . 26 below the assiduity average. Shells liquidity ratios are both below the industry average and illustrate their healthy status and continued strength for liquidity.Asset Management Ratios Asset Management 12/31/2011 12/31/2010 12/31/2009 12/31/2008 12/31/2007 Average Industry Comments Inventory Turnover 13. 6 10. 84 9. 77 15. 56 10. 84 12. 12 14. 9 OK Fixed Assets Turnover 3. 29 2. 76 2. 34 4. 28 3. 51 3. 24 1. 3 Healthy Total Asset Turnover 1. 45 1. 23 0. 99 1. 66 1. 41 1. 35 0. 6 Healthy take care 2 RDS. A Asset Management Ratio Trend Asset Management ratios give an indicator of efficiency (ability to assume inventory and generate gross revenue) within a company, particularly ones with tangible goods as compared to its competitors.You rotter see from human body 2 that in comparison to the industry average Shell is healthy and efficient in their assets and inventory turnover. jut 2 reflects a spi ke in Shells inventory turnover in 2008 however this arouse also be attributed to the economic downturn in 2008. Even with the spike Shells average is fluent on par with the industry and exemplifies a healthy asset management turnover. Debt Management Ratios Debt Management 12/31/2011 12/31/2010 12/31/2009 12/31/2008 12/31/2007 Average Industry Comments Debt Ratio 17. 90% 22. 80% 20. 20% 15. 0% 12. 60% 17. 76% 51. 98% Healthy Net Fixed Debt Ratio 15. 10% 18. 70% 18. 30% 9. 70% 8. 90% 14. 14% 27. 38% Healthy Debt to Equity Ratio 21. 70% 29. 61% 25. 36% 18. 06% 14. 37% 21. 82% 42. 69% Healthy Times liaison Earned 41. 54 36. 49 39. 78 33. 38 N/A 37. 79 25. 61 Healthy foresee 3 RDS. A Debt Management Ratio Trend Royal Dutch Shells Debt Management ratios indicate that it has been slight aggressive with using debt to finance growth than the volume of its competitors in the Oil & accelerator pedal industry.Across the board Shell has a demoralize debt ratio than their compe titors the resultant effect on earnings would be less volatile than related companies. The debt ratio is a solvency ratio that examines how much of a companys assets are made of liabilities. A debt ratio of 20 percent sum that 20 percent of the company is liabilities. A risque debt ratio can be negative this indicates the lotholder blondness is low and potential solvency issues. A low debt to virtue ratio indicates lower encounter, because debt holders have less claims on the companys assets. Overall Royal Dutch Shell is in an excellent Debt Management position. convention 4 RDS. A Debt Management Ratio (TIE) Trend Times engage earned or Interest Coverage Ratio is a hear metric to regularise the credit worthiness of a business. Essentially, the number represents how some(prenominal) times in the last 12 months EBIT (earnings before interest and taxes) would have covered the past 12 months interest expenses. Royal Dutch Shells times interest earned ratio has a four year av erage of 37. 79, which is 12. 18 points superior than the industry average which rests at 25. 61. This presents Shell in a healthy credit worthiness business. profitableness RatiosProfitability Ratios 12/31/2011 12/31/2010 12/31/2009 12/31/2008 12/31/2007 Average Industry Comments Net Profit Margin on Sales 6. 32% 5. 47% 6. 88% 3. 32% 10. 19% 6. 44% 6. 50% Healthy Basic Earning Power Ratio 16. 12% 10. 96% 7. 19% 18. 00% 18. 77% 14. 21% 6. 80% Healthy ROA % (Net) 9. 26% 6. 55% 4. 36% 9. 50% 12. 41% 8. 42% 10. 15% Healthy ROE % (Net) 19. 47% 14. 15% 9. 49% 20. 86% 27. 28% 18. 25% 14. 24% Healthy throw 5 RDS. A Profitability Ratio Trend When it comes to profitability, Royal Dutch Shell is on average with its competitors.Net Profit Margin is the net earnings of a company / sales. This profitability ratio compares the percent of net earnings from a companys sales. Royal Dutch Shells Net Profit is on par with other companies in the Oil Gas industry, which means it has an comp rise ability swing assets on business operations when compared to its competitors. Basic earning power shows the raw earning power of a firms assets before taxes and other leverages. This go forth help the firm understand their go along on its assets. Return on Assets or ROA, shows the rate of return ( by and by tax) being earned on all of the firms assets no matter of financing structure.It is a measure of how efficiently the company is using all stakeholders assets to earn returns. Royal Dutch Shell has a five year average of 8. 42%, which is 1. 73% lower than the industry average, however still in the healthy zone. Return on equity or ROE is used to measures the rate of return on the money invested by everyday stock owners and retained by the company from previous profitable years and shows how well a company uses investment funds to generate growth. Royal Dutch Shells Return on Equity indicates that it is able to reinvest its earnings more efficiently than the majority of i ts competitors in the Oil Gas industry.Typically, companies that have higher return on equity comforts are more attractive to investors and can provide for better growth and profitability. Market Value Ratios Market Value Ratios 12/31/2011 12/31/2010 12/31/2009 12/31/2008 12/31/2007 Average Industry Comments expense per Earning Ratio 7. 64% 10. 14% 14. 24% 6. 06% 8. 32% 9. 28% 7. 86% Healthy Dividend Yield 4. 60% 5. 03% 5. 52% 5. 89% 3. 34% 4. 88% 4. 76% Average Payout Ratio 5. 46% 4. 76% 8. 41% 3. 62% 2. 87% 5. 02% 2. 67% Healthy Book Value per Share $ 54. 98 $ 47. 85 $ 45. 5 $ 42. 02 $ 38. 61 $ 45. 70 $ 46. 43 Average Earnings per Share $ 4. 98 $ 3. 28 $ 2. 04 $ 4. 27 $ 5. 00 $ 3. 91 $ 3. 26 Average Figure 6 RDS. A Market Value Ratio Trend Earnings per grapple (EPS) is the nitty-gritty of income that belongs to each share of common stock. An important tool for investors, EPS is often used in come up the abide by of a stock. As noted above, Royal Dutch Shell is on a verage with other firms in its industry. Book value per share has slowly been on a rise over the past 5 years, from $38. 61 in 2007 up to 54. 8 in 2011. Book value is a companys net asset value a relatively high book value per share in relation to stock expense often occurs when a stock is undervalued and might be an attractive buy. Figure 7 RDS. A Market Value Ratio Trend The worth per earnings ratio (PE) is the measure of the share price relative to the annual net income earned by the firm per share. PE ratio shows current investor engage for a company share. A high PE ratio generally indicates add demand because investors anticipate earnings growth in the future. Royal Dutch Shell has a five year average of 9. 8% PE as compared to the industry average of 7. 86% Shell is higher by 1. 42%. The dividend yield is the sum of a companys annual dividends per share, divided by the current price per share. When investing in companies an investor should look for a stable and high divi dend yield this can insure an investor a secure a relatively stable cash flow. Royal Dutch Shells dividend yield is on par with other companies. As indicated by the payout ratio, Royal Dutch Shells earnings support the dividend payouts more than others in the same industry group. capital Flow and Growth AnalysisRoyal Dutch Shell Cash Flow $ meg 2011 2010 2009 2008 2007 Cash and Cash Equivalents at January 1 $ 13,444 $ 9,719 $ 15,188 $ 9,656 $ 9,002 NetCashfrom in operation(p)Activities $ 59,393 $ 42,712 $ 30,731 $ 69,787 $ 53,324 Net Cash used in Investing Activities $ (20,443) $ (21,972) $ (26,234) $ (28,915) $ (14,570) Net Cash used in Financing Activities $ (18,131) $ (1,467) $ (829) $ (9,394) $ (19,393) Net (Decrease)/increase, Cash & Cash Equivalents $ (2,152) $ 3,725 $ (5,469) $ 5,532 $ 654 Cash & Cash Equivalents atDecember31 $ 11,292 $ 13,444 $ 9,719 $ 15,188 $ 9,656 Figure 8 RDS. A Cash Flow Trend Information used and interpreted from the Royal Dutch She ll Investors Handbook illustrates that Royal Dutch Shell change magnitude the amount spent on operations from 2008 to 2009 this can most likely be due to the economic downturn. Conversely, from 2009 to 2011 there has been a steady increase in cash flows for operations.When evaluating charts in effigy 9 and 10 you can see that along with a decrease in cash flows from 2008 2009 so did Shell have a decrease in revenues, net income and Earnings per share. From 2009 2011 all areas show a steady and healthy growth. Growth Analysis Report Date 12/31/2011 12/31/2010 12/31/2009 12/31/2008 12/31/2007 Revenue $ 470,171 $ 368,056 $ 278,188 $ 458,361 $ 355,782 Net income for period $ 31,185 $ 20,474 $ 12,718 $ 26,476 $ 31,926 Net earnings per share-diluted $ 4. 97 $ 3. 28 $ 2. 04 $ 4. 26 $ 4. 9 Total assets $ 345,257 $ 322,560 $ 292,181 $ 282,401 $ 269,470 Total stockholders equity $ 171,003 $ 149,780 $ 138,135 $ 128,866 $ 125,968 Net Cash Equivalents Flow $ 1 1,300 $ 13,400 $ 9,700 $ 15,200 $ 9,560 Figure 9 RDS. A Growth Analysis Trend Figure 10 RDS. A Growth Analysis Trend Capital Structure union When performing the Capital Structure Estimation, the assessor can exam how the combining of equity capital and debt capital that a firm uses to finance its assets can have a positive or negative affect on the firm. The capital structure is how a firm finances its overall operations and growth by using different sources of funds. Royal Dutch Shells use of debt and ommon stock (Royal Dutch Shell does not issue preferable stock) continues the open market and, as a result, the firms greet of capital is impacted in both constructive and/or destructive ways. RDS. A Market Value Method / Weights Debt $ 174,250,000,000. 00 27. 71% Equity $ 454,619,800,000. 00 72. 29% RDS. A Book Value Method / Weights Debt $ 174,250,000,000. 00 50. 47% Equity $ 171,000,000,000. 00 49. 53% Figure 11 RDS. A Capital Structure Estimation By examining the B alance Sheet and the numbers in experience 11 you can see that Royal Dutch Shell, based on market value, has a capital structure of 27. 1% debt and 72. 29% equity in the form of common stock totaling a market capitalization of $454 billion. When utilizing the book value, the weighing scale becomes 50. 47% debt and 49. 53% equity with a value of $171 billion. burden Average Cost of Capital (WACC) Knowing a firms weighted average cost of capital is crucial when considering any new projects. A firms WACC is the overall required return on the firm as a whole and, as such, it is often used congenitally by company directors to determine the economic feasibility of expansionary opportunities and mergers. Generally speaking, a companys assets are financed by either debt or equity.WACC is the average of the costs of these sources of financing, each of which is weighted by its respective use in the given situation. The weighted average can show how much interest the company has to pay for every dollar it finances. This section of the report pull up stakes determine Royal Dutch Shells weighted average cost of capital. In determining the firms factor cost of common equity, the average of three methods bequeath be utilized Capital Asset Pricing Modem (CAPM), Discounted Cash Flow (DCF), and bond-yield- cocksure- attempt-premium (BYPRP). Calculating the cost of debt (after tax) is forecast by using the corporate tax rate and the cost of debt (Kd) which will be based on Royal Dutch Shells bond rating. Cost of DebtRoyal Dutch Shells after-tax cost of debt is compute at 2. 30%. The calculation was resolute using Shells corporate AA 10 year bond rating market value. RDS. A Cost of Debt RDS. A 10 year stick Rating AA Cost of Debt 2. 43% riskiness Free govern 1. 62% After tax income Cost of Debt 2. 30% Kd(1-T) Corporate Tax Rate 41. 85% Figure 12 RDS. A Cost of Debt Cost of Equity CAPM Capital Asset Pricing ideal (CAPM) is a model that describes the relationship b etween risk and expected return and that is used in the pricing of risky securities. The general idea prat CAPM is that investors need to be compensated this is calculated by the CAPM.The time value of money is represented by the risk-free (rf) rate in the pattern and compensates the investors for placing money in investments over a period of time. The other half(prenominal) of the formula represents risk this is calculated by taking a risk measure (beta) that compares the returns of the asset to the market over a period of time and to the market premium (Rm-rf) or Market risk premium (MRP). Figure 13 illustrates the outcome of the calculations and that Royal Dutch Shells CAPM is 10. 01%. RDS. A Cost of Equity CAPM Formulated by Rs = Rf + ba * MRP gamble Free Rate (Rf) 1. 62% Yahoo Finance U. S. Treasury bind Rate Market Risk Premium or (Rm-rf) 6. 50% Current Rate November, 2012 Beta (ba) 1. 29% E-Trade Financial CAPM of RDS. A 10. 01% Cost of Debt (Kd) 2. 43% After Tax Cos t of Debt 2. 30% Figure 13 RDS. A Cost of Equity Cost of Equity DCF The Discounted Cash Flow or DCF method uses futurefreecash flow projections and discounts them to arrive at a present value, which is used to evaluate the potential for investment. Figure 14 illustrates a breakdown of how the discounted cash flow is calculated. The growth rate (g) is the average of three outside estimations. After the calculation is computed, the cost of equity is equal to 11. 83%. RDS. A Cost of Equity DCF Formulated Rs = (D1/Po)+g so D1= Do(1+g) so (((Do(1+g)/Po)+g) Rs = (((3. 42(1+6. 42%)/67. 02)+6. 42%) Average E-Trade Yahoo Y-Charts Growth Rate (g) 6. 42% 6. 80% 6. 12% 6. 35% Dividend (Do) 3. 42 Y-Charts contain Price (Po) 67. 02 Current Rate November 2012 Rs = 11. 83% Figure 14 RDS. A Cost of Equity Cost of Equity BYPRP Bond yield plus risk premium method is used to calculate cost of common equity for a firm. Figure 15 shows the calculation, the after tax cost of debt plus bond risk prem ium rate which calculates to a cost of equity equal to 8. 80%. RDS. A Cost of Equity BYPRP Rs = BY + MRP RDS. A After Tax Cost of Debt (BY) 2. 30% Shell Investors Handbook Bond Market Risk Premium (MRP) 6. 50% Current Rate November, 2012 Rs= 8. 80%Figure 15 RDS. A Cost of Equity Weighted Average Cost of Capital WACC The WACC equationis the cost of each capital component partmultiplied by its proportional weight. To calculate the WACC we root take the average of the CAPM, DCF and BYPRP methods which is calculated in figure 16. RDS. A Average Cost of Equity CAPM DCF BYPRP Average Royal Dutch Shell 10. 01% 11. 83% 8. 80% 10. 21% Figure 16 RDS. A Average Cost of Equity Royal Dutch Shell has no preferred stock, thus weight of preferred stock (Wp) is equal to 0%. Figure 17 breaks down the full calculation of the Weighted Average Cost of Capital calculation and the defined values.Using the Weight of Equity and Weight of Debt calculated from the Capital Structure Estimation in figu re 11 we can conclude that Royal Dutch Shells WACC is equal to 8. 28%. Royal Dutch Shell Plc WACC WACC formulated WACC = Ws*Rs + Wd*Rd*(1-Tax Rate) + Wp*Rp. Ws 72. 29% Weight of Equity (Common Stock) Wd 27. 71% Weight of Debt Wp 0. 00% Weight of Preferred Stock Rd 2. 30% After Tax Cost of Debt Tax rate 41. 85% Corporate Tax Rate Rs 10. 21% Cost of Equity (Average) Rp 6. 50% Market Risk Premium WACC 8. 28% Weighted Average Cost of Capital Figure 18 RDS. A WACC get wind Cash Flow Estimation Royal Dutch Shell has been approached with a proposition for a new project. The project will have a life span of eight years.The proposed project requires initial investment of $580 million to construct building and purchase equipment, and $38 million for shipping & readiness fee for a total of $618 million is start-up costs. The fixed assets fall in the 7-year MACRS class and has a salvage value of fixed assets at $17 million. It is expected that the new product will sale 2,280,000 uni ts in the offset year and has an expected annual growth rate of 8. 5%. The sales price is $275 per unit and the variable cost is $205 per unit in the first year, but they should be adjusted accordingly based on the estimated annualized flash rate of 2. 3%. The required net operating working capital (NOWC) is 11. 5% of sales.A detailed analysis and calculations for the cash flow estimation and dispraise details must be performed to ensure that Royal Dutch Shell can undertake such a project. Initial Inputs and Parameters for the Proposed Project Start-Up Cost $618,000,000 Net Operating WC/Sales 11. 5% Market value of equipment at Year 8 $17,000,000 First year sales (in units) 2,280,000 Tax rate 41. 85% Sales price per unit $275. 00 WACC 8. 28% protean cost per unit $205. 00 Inflation 2. 3% Non-variable costs $0 Growth in Sales 8. 5% Figure 19 RDS. A Project Parameters dispraise and Amortization Schedule Year 1 2 3 4 5 6 7 8 Total Ra te 14. 0% 25. 0% 17. 0% 13. 0% 9. 0% 9. 0% 9. 0% 4. % century% Cost $86,520,000 $154,500,000 $105,060,000 $80,340,000 $55,620,000 $55,620,000 $55,620,000 $24,720,000 $618,000,000 Total $0 Figure 20 RDS. A wear and tear Schedule Figure 20 illustrates the depreciation schedule of eight years, outlined in the project parameters. Project Net Cash Flow Figure 21 RDS. A Project Estimated Net Cash Flow Capital Budgeting Analysis Capital Budgeting Analysis is a process in which a business determines whether projects or investing in a long-term contingency are worth pursuing. Ideally, businesses should pursue all projects and opportunities that enhance shareholder value.However, the amount of capital available at any given time for new projects is limited, capital budgeting analysis will help to determine if a project is feasible or not. Capital budgeting analysis can include net present value (NPV), internal rate of return (IRR), modified internal rate of return, prof itability index finger (PI), requital period and discounted payback. In collusive if this project is possible or not we have determined the following budgeting analysis results in figure 22. RDS. A Budgeting Appraisal Results Net Present Value (NPV) $ 284,606,920. 00 inner Rate of Return (IRR) 17. 0% Modified inborn Rate of Return (MIRR) 13. 1% Profitability indicant (PI) 1. 41 requital (Years) 4. 74 Figure 22 RDS. A Project Analysis Results RDS. A Payback Calculation 0 1 2 3 4 5 6 7 8Net Cash Flow (690,105,000) 121,087,715 158,870,226 148,538,663 149,691,454 152,108,518 166,274,191 181,997,451 362,518,222 Cumulative CF (690,105,000) (569,017,285) (410,147,060) (261,608,396) (111,916,943) 40,191,576 206,465,767 388,463,218 750,981,440 Pay Back 1. 00 1. 00 1. 00 1. 00 0. 74 0. 00 0. 00 0. 00 After follow-up of the budgeting analysis results we can conclude that the project should be undertaken. The Profitability Index (PI) is 1. 41, if the PI is great er than 1 than the project should be taken, additionally the net present value is positive, another good sign for accepting the project. The projects Internal Rate of Return (IRR) is 17. 0%, higher than Royal Dutch Shells WACC which is 8. 8%, this is an optimistic calculation for accepting the project. Finally, payback addresses the projects liquidity, shorter the payback the higher the liquidly and with a current estimation of 4. 74 years, the project is passing recommended. Sensitivity Analysis The Sensitivity Analysis is a modus operandi used to determine howdifferent values of an independentvariable will impact a particular dependent variable under a given set of assumptions. Within specialisedboundaries, the sensitivity analysis is very usefulwhen attempting to determine the impactthe actualoutcome of a particular variable will haveif itdiffers from what was previously assumed.By creating agiven set of scenarios as, illustrated in figure 23, the analyst can determine how chang es in one variable(s) will impact thetarget variable. In this particular case the sensitivity analysis will determine how the net present value (NPV) of the proposed project will be affected by the modification of several variables these variables and the results can be examined in the following figures. The modified variables are sales price, variable costs, units sold, non-variable costs, weighted average cost of capital, corporate tax rate and start-up costs. For the purpose of this analysis the calculations were performed with a 10% and 20% deviation from the base in both a negative and positive trend. RDS. A Project Sensitivity Analysis Calculations going away 1st YEAR UNIT SALES % excursus WACC from Units Sold NPV from NPV unintellectual Case $284,606,920 install Case WACC $284,606,920 -20% 1,824,000 144,446,239 -20% 6. 6% 358,280,443 -10% 2,052,000 214,526,580 -10% 7. 5% 320,454,423 0% 2,280,000 284,606,920 0% 8. 3% 284,606,920 10% 2,508,000 354,687,261 1 0% 9. 1% 250,612,056 20% 2,736,000 424,767,602 20% 9. 9% 218,353,128 % Deviation VARIABLE COST % Deviation SALES PRICE from Variable NPV from Sales NPV basal Case be $284,606,920 Base Case Price $284,606,920 -20% $164. 00 723,298,488 -20% $220. 0 (294,245,328) -10% 184. 50 503,952,704 -10% 247. 50 (4,819,204) 0% 205. 00 284,606,920 0% 275. 00 284,606,920 10% 225. 50 65,261,137 10% 302. 50 574,033,045 20% 246. 00 (154,084,647) 20% 330. 00 863,459,169 % Deviation NONVARIABLE COST % Deviation TAX RATE from Fixed NPV from NPV Base Case Costs $284,606,920 Base Case TAX RATE $284,606,920 -20% $0 284,606,920 -20% 33. 5% 353,919,217 -10% 0 284,606,920 -10% 37. 7% 319,304,434 0% 0 284,606,920 0% 41. 8% 284,689,652 10% 0 284,606,920 10% 46. 0% 250,074,869 20% 0 284,606,920 20% 50. % 215,460,087 % Deviation START-UP COSTS from NPV Base Case Start-Up Costs $284,606,920 -20% $ 494,400,000. 00 368,892,485 -10% $ 556,200,000. 00 326,749,703 0% $ 618,0 00,000. 00 284,606,920 10% $ 679,800,000. 00 242,464,138 20% $ 741,600,000. 00 200,321,356 Figure 23 RDS. A Project Sensitivity Analysis Calculations Royal Dutch Shell Project Sensitivity Analysis Chart Figure 24 RDS. A Proposed Project Sensitivity Analysis Chart Deviation NPV at contrary Deviations from Base from Sales Variable Non-variable Base CasePrice Cost/Unit Units Sold Cost WACC Tax Rate Start-Up Costs -20% ($294,245,328) $723,298,488 $144,446,239 $284,606,920 $358,280,443 353,919,217 368,892,485 -10% (4,819,204) 503,952,704 214,526,580 284,606,920 320,454,423 319,304,434 326,749,703 0% 284,606,920 284,606,920 284,606,920 284,606,920 284,606,920 284,689,652 284,606,920 10% 574,033,045 65,261,137 354,687,261 284,606,920 250,612,056 250,074,869 242,464,138 20% 863,459,169 (154,084,647) 424,767,602 284,606,920 218,353,128 215,460,087 200,321,356 Range $1,157,704,497 $877,383,134 $280,321,363 $0 $139,927,315 $138,459,130 $ 168,571,129 Figure 25 RDS. A Proposed Project NPV and Range at Different Deviations from Base Scenario Analysis A scenario analysis is the process of estimating the expected value of a portfolio or project after a given period of time under specific changes in variables of the portfolios securities or changes in key factors. Commonly, scenario analysis focuses on estimating what a portfolios value would decrease toif an unfavorable event would occur.For the proposed project the scenario analysis was conducted expect a 25% chance for best-case conditions each of the variables calculated in figure 25 would be 20% better than its base-case value. Conversely, there is a 25% probability of worst-case conditions, with the variables 20% worse than the base a 50% probability was used for base-case conditions. All figures have been calculated below in figure 26. Scenario Probability Sales Price Unit Sales Var Costs NPV Squared Deviation times Probability Best Case 25% $330. 00 2,7 36,000 $164. 00 $1,726,918,338 422505172390830000 Base Case 50% $275. 00 2,280,000 $205. 00 $284,606,920 10125137435137500 Worst Case 25% $220. 00 1,824,000 $246. 00 ($588,490,656) 257759816231319000 anticipate NPV = Sum, Prob. times NPV $426,910,381 Standard Deviation $830,897,181 Coefficient of Variation = Std Dev / Expected NPV 1. 95 Figure 26 RDS. A Proposed Project Scenario Analysis Conclusion In conclusion, after performing a complete analysis on the feasibility of the proposed project, it is determined that it would be beneficial for Royal Dutch Shell, plc to implement the project. The IRR and MIRR are greater than the WACC of 8. 28%, at 17. 0% and 13. 1% respectively. It is currently estimated that the project will pay for itself in approximately 4. 74 years according to the discounted payback calculations.The Net present value of the project is positive and the profitability index for the project is 1. 41 (greater than 1) it is a positive sign for the project selection. Royal Dutch Shell is currently moving in a positive direction with a healthy financial base. Financial analyses have bestowed Shell with an AA bond rating, which underlines the financial strength of the organization. Based on all the selective information listed above, it is with my professional opinion after the evaluation within this report that Royal Dutch Shell takes on the project with the current and estimated futures of Shell it can only add value to the corporation. References E*Trade. 2011, December 31). Royal Dutch Shell Plc RDS. A. Retrieved November 28, 2012, from E*Trade Financials https//www. etrade. wallst. com/v1/stocks/snapshot/snapshot. asp? YYY220_/UfRI8EalsBAnXarKLCzPko3kjoyjLMbzW9xSdWWCGroVsRTAdKeDJzNAwM5xeMSzfFm9X4tAHc+eI+8pZ9rdHSsGMEaof+37qAzRA17/MKnpCPFTrRrGXhYPAZVsWXkzq5OKgjy67owAqAG5C1fyJ6IzD55l8M8TBKZkWpNM0lH4j7Jb2aXQsoxNw Morningstar, Inc. (2012). Morningstar research. Retrieved November 2012, from http//financials. morningstar . com/ratios/r. html? t=RDSA®ion=GBR& ampculture=en-US Network, Y. -A. (2012). Yahoo Finance. Retrieved November 28, 2012, from Bond tenderness http//finance. yahoo. om/bonds Royal Dutch Shell. (2012). Building an Energy Future Investors Handbook. London Royal Dutch Shell Plc Financials. YCharts Pro Stock Report. (2012). Royal Dutch Shell plc (RDSA). New York Y Charts. Appendix Royal Dutch Shell Income avouchment Billions $ Royal Dutch Shell Balance Sheet Billions $ Royal Dutch Shell Statement of Cash Flow Billions $ 1 . (YCharts Pro Stock Report, 2012) 2 . (YCharts Pro Stock Report, 2012) 3 . (YCharts Pro Stock Report, 2012) 4 . (YCharts Pro Stock Report, 2012) 5 . (YCharts Pro Stock Report, 2012) 6 . (YCharts Pro Stock Report, 2012) 7 . (YCharts Pro Stock Report, 2012) 8 . (Royal Dutch Shell, 2012) 9 . (YCharts Pro Stock Report, 2012) 10 . (Royal Dutch Shell, 2012) 11 . (Royal Dutch Shell, 2012) 12 . (Royal Dutch Shell, 2012) 13 . ( Royal Dutch Shell, 2012) 14 . (Royal Dutch Shell, 2012) 15 . (Network, 2012) 16 . (E*Trade, 2011) 17 . (E*Trade, 2011)