Investment and Pioneer Petroleum

Pioneer petroleum Case I. Statement of Problem As Pioneer oil colour continues to occur as a company, they are trying to determine the best style to approach a minimum rate of return. As of right now, they take over two approaches they nooky take. The first would be taking a whiz crosscut rate based on the companys boilers suit WACC. The second, rather than a single cutoff, in that location would be multiple cutoff rates due to the risk of infection-profit characteristics. II. Statement of Facts and Assumption Pioneer Petroleums approach to capital of the United States budgeting was to altogether accept investments with positive net front value.Currently, Pioneer Petroleum calculated their WACC at 9% shown in opine 1 below. In calculating their WACC, PPC uses book value weights. When dealing with practicality, it is bettor to use market value weights because it provides what the expectations of the market and the investors have. By using this information, it canister show what a company needs to do to gain unused capital. III. Analysis Pioneer Petroleum was created after merging with multiple firms causing it to branch out into different markets.With multiple projects, the most effective amour PPC could do is to implement using single corporate cost 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 going in this bang 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 all(prenominal) 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 positive net present value, but they similarly need to assume the different risks assoc iated with it. Something else they might consider is the length of the adulthood for the project. More risk could be found in younger projects and elder projects as well. By using a single cutoff rate, they can analyze more precisely how much it will effect their decisions in the future. Figure 1 WACC = Rdebt(1-TC)(D/V) + Requity(E/V) 9% = . 12(1-. 34)(. 5) + (. 10)(. 5)