Action Items:<\/p>\n
There are two components of NPV that can be changed in order to show risk. The first one is future cash flows. Knowing that Venezuela would not be a place to invest, I could make sure that when calculating future cash flows, that everything is taken into consideration to show that future cash flows would be lower if Chevron invested in Venezuela versus other countries. Exposing these risks would cause the future cash flows to decrease. The second component of NPV is the discount rate. I could increase the discount rate to show that investments in this country have a higher risk than other countries. There are other things you can do to reflect a greater risk for this investment, but these two components of NPV are good ways to do it.<\/p>\n
Ross, S., Westerfield, R., & Jordan, B. (2021). <\/span>Fundamentals of Corporate Finance<\/em>, 13e. McGraw-Hill.<\/span><\/p>\n Student 2 Response:<\/b><\/span><\/p>\n Venezuela’s infrastructure was on the verge of collapse under President Nicolas Maduro’s regime. In an attempt to force him out of power, President Trump imposed harsh sanctions that prevented American companies from doing business in Venezuela. The oil industry in Venezuela has been going downhill due to power outages, mismanagement, and under investment (Egan, 2019). It would have been very difficult for Chevron to have predicted these sanctions because if President Trump had not been elected, then the sanctions would probably not exist. Not to mention Chevron has operated out of Venezuela for nearly 100 years. <\/p>\n Normally a discount rate is determined by the market. However, it is common when dealing in foreign countries for companies to use a risk-adjusted discount rate. The discount rate is increased to plan for currency fluctuations in the foreign countries, or in this case sanctions by the government that prohibit dealing in that country or that increase costs to produce in a foreign country. The riskier the project the higher the discount rate is adjusted. We can also use a beta to reflect higher risk. A beta over 1 is a project that is above normal risk, so a higher beta will reflect the higher risk of operating in an unstable foreign country (Gorton, 2022). <\/p>\n References<\/span><\/p>\n Egan, M. (2019, <\/span>Chevron has been in Venezuela for nearly 100 years. It could finally be forced to leave. <\/span><\/i>CNN Business. Retrieved 7\/19\/23, from <\/span>https:\/\/www.cnn.com\/2019\/06\/19\/business\/chevron-venezuela-oil-sanctions\/index.html<\/span>Links to an external site.<\/span><\/span><\/a><\/p>\n
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