Financial Analysis- for Royal Dutch Shell

kingly Dutch rebuke, Plc. (NYSE RDS. A) T commensu deem of Contents Executive Summary3 Introduction4 Financial proportionality Analysis5 Liquidity6 Asset wariness7 Debt Management8 Profitability10 market place Value12 hard currency liquify and crop Analysis14 nifty Structure Estimation16 Weighted come comprise of Capital17 court of Debt17 Cost of Equity CAPM18 Cost of Equity DCF19 Cost of Equity BYPRP19 WACC20 pop the question notes go down Estimation21 Capital Budgeting Analysis23 sensitiveness Analysis24 Scenario Analysis27 Conclusion28 References29 Appendix30Executive Summary This report analyzes royal stag Dutch musical scale Plc. (RDS. A on NYSE) pecuniary status, history, market space, and growth opportunities. Royal Dutch buckler Plc. ( pillow slip) is one of the worlds largest corpo proportionalityns with annual revenue of $470 billion for fiscal year 2011. When analyzing a party it is vital to ensure all aspects of the unwaverings financial stand up are stable, this is essential to guarantee its ability to take upon new major images, such as the one macrocosm proposed at this clock time and evaluated in this report.This report intends to evaluate the possibility of Shell chthonictaking a project that requires a total initial investment of $580 one thousand million in fixed assets as wells as operation expenses of $38 million, for a total of $618 million is startup monetary regard ass. This report illustrates Shells financial standing through, ratio analysis, cash flow analysis, and detailed gravid budgeting analysis to help calculate Shells capacity to accept the proposed project. The life of the project entrust be eight historic period and expected to boast a growth rate of 8. 5%.The winnings Present Value of the project is approximately $284 million and is expected to pay for itself in approximately 4. 74 years according to discounted payback calculations (detailed in report). Introduction Royal Dutch Shell plc o perates as an oil, gunslinger and energy company that explores for and extracts hydrocarbons worldwide. Royal Dutch Shell to a fault transfers natural gas to liquids to provide cleaner-burning fuels markets and trades natural gas extracts bitumen from mined oil sands and convert it to synthetic crude oil and generates electricity from wind energy.In addition, it converts crude oil into a range of refined products, including gasoline, diesel, heating oil, aviation fuel, marine fuel, lubricants, bitumen, sulphur, and liquefied oil color gas (LPG) and produces and sells petrochemicals for industrial use. The company holds interests in approximately 30 refineries 1,500 storage tanks and 150 distribution facilities and fuels retail network of approximately 43,000 service stations down the stairs the Shell brand name. Royal Dutch Shell plc also markets its products under the Shell V-Power and Shell FuelSaver brand names.In addition, the company offers lubricants for use in passenger c ars, trucks, and coaches, as well as for industrial machinery in manufacturing, mining, power generation, agriculture, and construction industries. Royal Dutch Shell plc sells fuels, specialty products, and services to commercial customers offers fuel for approximately 7,000 aircraft all 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. Royal Dutch Shell plc is headquartered in The Hague, plunderherlands and employs roughly 23,000 people worldwide. (Royal Dutch Shell, 2012). Financial ratio Analysis The following table illustrates Royal Dutch Shells financial ratios analysis and give assist in the understanding of the flow rate and (estimated) future status of the organization. The ratios will allow for a general interpretation of the levels capability and ability to take on impertinent projects. The table exemplifies the liquidity, asset way, debt management, gainfulness, and market jimmy standpoint of the theatre.Examining Royal Dutch Shells financial ratios evidences a incontrovertible outlook for the company, in comparison to the industry fair(a) Shell is performing exceptionally well. Royal Dutch Shell, Plc. (NYSE RDS. A) Financial Ratios Liquidity Ratios 12/31/2011 12/31/2010 12/31/2009 12/31/2008 12/31/2007 Average exertion Comments Quick Ratio 0. 85 0. 8 0. 79 0. 9 0. 84 0. 84 1. 1 powerful Current Ratio 1. 17 1. 12 1. 14 1. 1 1. 15 1. 136 1. 5 rosy Asset Management 12/31/2011 12/31/2010 12/31/2009 12/31/2008 12/31/2007 Average Industry Comments strain Turnover 13. 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 vigorous Total Asset Turnover 1. 45 1. 23 0. 99 1. 66 1. 41 1. 35 0. 6 Healthy Debt Management 1 2/31/2011 12/31/2010 12/31/2009 12/31/2008 12/31/2007 Average Industry Comments Debt Ratio 17. 90% 22. 80% 20. 20% 15. 30% 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 Profitability 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 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 commercialize Value Ratios 12/31/2011 12/31/2010 12/31/2009 12/31/2008 12/31/2007 Average Industry Comments Price 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 divide $ 54. 98 $ 47. 85 $ 45. 05 $ 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 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 frame of reference 1 RDS. A Liquidity Ratio Trend The current ratio measures a companys ability to pay short-term debts and different current liabilities by comparing current assets to current liabilities. The ratio illustrates a companys ability to remain solvent. Shells five year current ratio average is 1. 13, . 37 below the industry average, and their quick ratio is . 84, . 26 below the industry average. Shells liquidity ratios are both below the industry average and illustrate their healthy status and con tinued 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 ascertain 2 RDS. A Asset Management Ratio Trend Asset Management ratios give an indicator of efficiency (ability to move lineage and generate sales) within a company, contingently ones with tangible goods as compared to its competitors.You can see from figure 2 that in comparison to the industry average Shell is healthy and efficient in their assets and inventory turnover. double 2 reflects a spike in Shells inventory turnover in 2008 however this can also be attributed to the economic downturn in 2008. Even with the spike Shells average is still on par with the industry and exemplifies a healthy asset management tu rnover. 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 hobby Earned 41. 54 36. 49 39. 78 33. 38 N/A 37. 79 25. 61 Healthy Figure 3 RDS. A Debt Management Ratio Trend Royal Dutch Shells Debt Management ratios indicate that it has been less aggressive with victimisation debt to finance growth than the majority of its competitors in the crude & Gas industry.Across the board Shell has a lower debt ratio than their competitors 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 means that 20 percent of t he company is liabilities. A senior high school debt ratio can be banish this indicates the shareholder righteousness is low and potential solvency issues. A low debt to equity ratio indicates lower risk, because debt holders have less claims on the companys assets. Overall Royal Dutch Shell is in an excellent Debt Management position.Figure 4 RDS. A Debt Management Ratio (TIE) Trend Times interest earned or Interest Coverage Ratio is a key metric to determine the credit worthiness of a business. Essentially, the number represents how many a(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 average 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. Profitability RatiosProfitability Ratios 12/31/2011 12/31/2010 12/31/2009 12/31/200 8 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 Figure 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 equal ability spend 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 will help the firm understand their return on its assets. Re turn on Assets or ROA, shows the rate of return (after tax) being earned on all of the firms assets regardless of financing organise.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 utilise to measures the rate of return on the money invested by common stock owners and retained by the company from previous gainful 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 much efficiently than the majority of its competitors in the Oil Gas industry.Typically, companies that have higher return on equity values 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 1 2/31/2008 12/31/2007 Average Industry Comments Price 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 share (EPS) is the amount of income that belongs to for each one share of common stock. An important tool for investors, EPS is often utilize in determining the value of a stock. As noted above, Royal Dutch Shell is on average 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 price often occurs when a stock is undervalued and might be an attractive buy. Figure 7 RDS. A Market Value Ratio Trend The price 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 demand for a company share. A high PE ratio generally indicates increased 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 dividend 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 i ndustry group. Cash Flow and gain AnalysisRoyal Dutch Shell Cash Flow $ Million 2011 2010 2009 2008 2007 Cash and Cash Equivalents at January 1 $ 13,444 $ 9,719 $ 15,188 $ 9,656 $ 9,002 NetCashfromOperatingActivities $ 59,393 $ 42,712 $ 30,731 $ 69,787 $ 53,324 Net Cash employ 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 Shell Investors Handbook illustrates that Royal Dutch Shell decreased 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 calm down increase in cash flows for operations.When e valuating charts in figure 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 underwrite 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 $ 11,300 $ 13,400 $ 9,700 $ 15,200 $ 9,560 Figure 9 RDS. A Growth Analysis Trend Figure 10 RDS. A Growth Analysis Trend Capital Structure Estimation When performing the Capital Structure Estimation, the tax assessor can exam how the combination of equity metropolis 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 preferred stock) impacts the open market and, as a result, the firms speak to 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 repose Sheet and the numbers in figure 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. Weighted Average Cost of Capital (WACC) Knowing a firms weighted average exist 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 internally 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 will determine Royal Dutch Shells weighted average cost of capital. In determining the firms factor cost of common equity, the average of three methods will be utilized Capital Asset Pricing Modem (CAPM), Discount ed Cash Flow (DCF), and bond-yield-plus-risk-premium (BYPRP). Calculating the cost of debt (after tax) is figured 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 cypher at 2. 30%. The calculation was determined using Shells corporate AA 10 year bond rating market value. RDS. A Cost of Debt RDS. A 10 year bail Rating AA Cost of Debt 2. 43% Risk Free Rate 1. 62% After levy 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 Model (CAPM) is a model that describes the relationship between risk and expected return and that is used in the pricing of risky securities. The general idea behind CAPM is that investors need to be compensated this is calculated by the CAPM.The time value of money is correspond by the risk-free (rf) rate in the formula and compensates the investors for placing m oney in investments over a period of time. The other half 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 Risk Free Rate (Rf) 1. 62% Yahoo Finance U. S. Treasury Bond 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 Cost 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 calcula ted. 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 Stock 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 premium 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 componentmultiplied by its proportional weight. To calculate the WACC we first 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 figure 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 Project 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 leverage equipment, and $38 million for shipping & installation 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 units in the first 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 inflation rate of 2. 3%. The required net operating working capital (NOWC) is 11. 5% of sales.A detail ed analysis and calculations for the cash flow estimation and disparagement 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% Variable cost per unit $205. 00 Inflation 2. 3% Non-variable costs $0 Growth in Sales 8. 5% Figure 19 RDS. A Project Parameters Depreciation and Amortization Schedule Year 1 2 3 4 5 6 7 8 Total Rate 14. 0% 25. 0% 17. 0% 13. 0% 9. 0% 9. 0% 9. 0% 4. % 100% 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 Depreciation 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 venture 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, profitability might (PI), payback period and discounted payback. In calculating 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 Internal Rate of Return (IRR) 17. 0% Modified Internal Rate of Return (MIRR) 13 . 1% Profitability great power (PI) 1. 41 Payback (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 examine 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 greater 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 liqu idity, shorter the payback the higher the liquidly and with a current estimation of 4. 74 years, the project is highly recommended. sensitiveness 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. Withinspecificboundaries, 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 changes 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, varia ble 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 passing 1st YEAR UNIT SALES % Deviation WACC from Units Sold NPV from NPV Base matter $284,606,920 Base fount 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 10% 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 Base Case cost $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. 00 284,6 06,920 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% $ 618,000,000. 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 variant Deviations from Base from Sales Variable Non-variable Base CasePr ice 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 assuming a 25% probability 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 chance Sales Price Unit Sales Var Costs NPV Squared Deviation times Probability Best Case 25% $330. 00 2,736,000 $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 Expected 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 information listed above, it is with my professional opinion after the evaluation within this report that R oyal 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 Center http//finance. yahoo. om/bonds Royal Dutch Shell. (2012). edifice 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. Appen dix Royal Dutch Shell Income Statement 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 . 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