A Green NPV

European low cost carrier Ryanair announced a new project that will install Split Scimitar winglets on each of the company's Boeing 737-800s. The installation is expected to reduce fuel consumption by 1.5 percent and reduce CO2 emissions by 165,000 tons per year. So, the project is green for the environment, but is it green for stock holders? A quick calculation shows that it is. Based on the numbers, Ryanair spent €1.14 billion on fuel in a recent quarter, which amounts to €4.56 billion per year. A 1.5 percent savings in fuel costs is €68.4 million per year. This savings results in a payback period of 2.92 years. Assuming a 10 percent discount rate and 20 years of operation, the NPV is about €382 million. Sounds like a green, green project to us.   

NPV Analysis

It is always interesting to see a real-world application of concepts you have learned in class. Recently, Voyageur Pharmaceuticals Ltd. released the results of its capital budgeting analysis of a barium sulfate project in British Columbia, Canada. Notice the company repeatedly refers to the project NPV, but also calculates the IRR and payback period. The report includes the key variable assumptions and the NPV per share. What we also find interesting is the sensitivity figure near the bottom of the article. The company shows the sensitivity of the project to changes in operating costs, revenue, and capital. It appears that the NPV of this project is most sensitive to changes in revenue.

Women Outperform Men

Who are better investors, women or men? A recent interview with proprietary trader Kathy Donnelly discusses reasons why the evidence suggests that women tend to outperform men as investors.

Centerra's Kumtor Sensitivity

Centerra Gold, a Canadian mining company, recently released its NPV analysis of the Kumtor Mine, which is located in Kyrgyzstan. Centerra's release includes the projected cash flows for the next 11 years, the expected life of the mine. Centerra also conducted several sensitivity analyses, including a change in the discount rate, a change in the price of gold, changes in operating and capital costs, and changes in the exchange rate. We should note that Canterra proposes that the discount rate should only be 5 percent. This number seems low to us, especially when analyzing a project in a foreign country.

An Interview With Eugene Fama

Recently, an interview with Nobel laureate Eugene Fama, who laid the foundation for the efficient markets hypothesis, was published by The Market/NZZ. The wide-ranging interview covers topics from the problems with growing government debt, stock market bubbles, the efficient markets hypothesis versus behavioral investing, the reason for negative oil prices, and negative interest rates. Professor Fama also discusses his belief that the power of central banks is much more limited than many believe. The interview is definitely worth a read.

SRI Hits Oil Companies

It appears that socially responsible investing (SRI) is affecting at least some oil companies. Five of the largest six banks have decided that they will no longer finance drilling projects in the Artic. As renewable energy becomes more widely used, oil and gas reserves may become less valuable. At the same time, since bank financing appears to be drying up, financing for the industry becomes more difficult to obtain.

Smart Money Versus Dumb Money

The growth of passive investing, that is, investing in index funds, has arisen in large part due to the growing popularity of the efficient market hypothesis. In short, it seems that outperforming the stock market is a difficult, if not impossible, task. As a result, retail investors, sometimes referred to as dumb money, have flocked to index funds. A common belief on Wall Street is that in a severe market downturn, retail investors would flee the market. The 30 percent drop in the market over the past month has been a severe downturn. But, when fund flows, which is the amount of money put into or pulled out of an investment, is examined, the two S&P 500 Index ETFs favored by individuals showed net buying, while the ETF preferred by professionals showed net selling. In other words, the professionals ran and mom and pop actually bought more. With the market up about 5 percent for today, maybe dumb money does know a little more than previously believed.

A Fantastic NPV

One thing you should always consider is the reasonableness of any estimate. For example, Hycroft Mining recently announced that a gold mine the company on which the company has begun work has an NPV of $2.1 billion with an initial investment of $61 million! The project has an IRR of 147 percent and a profitability index of more than 34 times. While this certainly seems to be a fantastic project, we have some doubts about the extremely high NPV and IRR estimates. We would also mention that the discount rate of 5 percent, which was used by the company, seems low for a project of this risk. The stock market doesn’t believe the NPV of this mine is anywhere near $2.1 billion: The company’s current market capitalization is about $5 million.

Corporate Projections

A question often asked by students is how to get projections for a particular company. One way is to listen to what the company itself says, and the analyst call is a good place to start. Publicly traded companies have analyst calls to disclose management's opinions on the current state and future of the company. You can actually listen to many calls online, and the information on the call is reported online if you can't listen live. For example, Chevron recently held its analyst call. A lot of information is available If you look at the Corporate Overview link, you will find, for example, that Chevron expects its capital expenditures to be $20 billion in 2019, $18-$20 billion in 2020, and $19-$22 billion per year for 2021, 2022, and 2023. The company also reports that it has the lowest breakeven oil price in the industry. In short, the company itself is an excellent place to start for projections. However, we should advise you that these projections are not set in stone, but a only a good place to begin your analysis.

Inflation Expectations

One thing to keep in mind with present value calculations, if you calculate the present value using real cash flows and the real interest rate or nominal cash flows and the nominal interest rate, the present value will be unaffected. This is true for capital budgeting as well So where can you get expectations of future inflation? One place is the New York Federal Reserve, which publishes microeconomic data, including expectations of consumer inflation. We should warn you, these are expectations, and like any expectations, are not exact.