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• Dennis Thuo

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Running head: EXXON MOBIL

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Exxon Mobil Name: Institutional Affiliations: Date:

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Capital Expenditure In my view, it would not be advisable for Exxon Mobil to use only one company to analyze its capital expenditures across all its business units. Instead, the firm should recruit the services of different companies given the extent to which its business operations often cover. The process of budgeting for capital expenditures is important for businesses to operate effectively and register growth in terms of sound financial position. Capital expenditures are believed to be the expenses that businesses normally make in order for them to bring about financial benefits over a given period of time (Abreu et al, 2015). This implies that capital expenses are the cost of assets that entities normally make with the view of generating benefits over a period that is longer than the present year of taxation. In a way, this differentiates them from operational expenditures, which are expenses that involve assets that are always acquired with the view of them being used up or consumed within the same financial year. The cost of printer paper is for example an operational expense. On the other hand, the cost of acquiring equipment, company vehicles, buildings and even other corporations can be classified as capital expenditures. One of the reasons why Exxon Mobil should consider recruiting more than one firm to help in the management of its capital expenditures is because these forms of expenses tend to involve huge amounts of cash and should be able to bring about returns over a period of several years. As such, it is imperative for Exxon Mobil to plan for it carefully. Ordinarily, the process of preparing capital expenditure budget vary from company to company based on issues such as the type of business that the company is taking part in and its size. The first step in the process of capital budgeting involves individual departments submitting their requests for some of the items

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that they require that fall under capital expenditures. Once the requirements have been submitted, all is always left to the upper management teams to help in making decisions on which investment the firm stands to benefit from (Abreu et al, 2015). Exxon Mobil is however, one of the very largest American companies, which implies that its departments routinely submit capital expenditures that will have a long-term impact on its position within the strategic market. Tasking only one firm with the responsibility of analyzing its capital expenditures may not provide the insight that its board and its management needs to make decisions. As such, there is need for the firm to integrate input from more than one institution. This will ensure that strategic planning is done, which will further ascertain that the company meets all the objectives that it sets out to achieve. Besides, it is imperative to note that Exxon Mobil is a leading player in a very competitive field. As such, the firm needs to have a wider understanding of the market within which it operates. This can only be achieved in case it assembles consultants who comprehend different sections of the market. These consultants will be on standby to advise the board and the management on the most ideal investment to make given that they will have a deeper understanding of the financials of Exxon Mobil. As such, they will recommend the acquisitions that matter and those that will continue putting Exxon Mobil ahead of other entities. Evaluating the Divisional Costs of Capital In evaluating the divisional costs of capital for Exxon Mobil, I would use the Weighted Average Cost of Capital (WACC). WACC refers to an overall cost of capital of a given firm that is routinely calculated as the weighted average of the costs of each element of the capital where the weights act as the market values of each capital. WACC works as the benchmarking rate for

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the evaluation of new projects. In case the IRR of a given project is considerably less than WACC, the project should always be rejected. On the other hand, in case the IRR of the project is more than the WACC then the project is always approved. In the case of Exxon Mobil for example, it will be efficient to work out the IRR of each divisional project. This will be compared to the WACC of the firm. In case the IRR is higher than the WACC, then the management of the firm will be advised to consider embracing the investment given that it will be low-risk (Coll, 2012). On the other hand, in case the IRR is lower than WACC, then Exxon Mobil will be advised not to go ahead with making the investment. This is mainly because a form of investment whose IRR is higher than the WACC will be considered to be low-risk, which implies that the firm will stand to benefit significantly from the returns. On the other hand, investments whose IRRs will be lower than the WACC of Exxon Mobil will be perceived to be high-risk, which implies that Exxon Mobil will make loses in case it goes ahead with such forms of investments. One of the advantages of Exxon Mobil using the WACC evaluation strategy is the fact that it will make its process of electing projects more effective and efficient. At the same time, it is imperative to note that this approach cannot in a way be used to completely eradicate the possibility of error that exists in the selection of the projects. One of the shortcomings of the approach however is the fact that there is the possibility of Exxon Mobil settling on a wrong decision. This implies that at some point the firm can make a wrong investment at the expense of one that would have been much profitable to it in the future. That explains why the firm needs more than one consulting firm (Coll, 2012). Recruiting only one firm will predispose it to a lot of risk, as the firm will not be in a position to carry out an extensive evaluation of the market.

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In concluding, it is imperative to note that Exxon Mobil has been one of the most successful American firms over the past few decades. The firm has no doubt played a key role in the implementation of American National Interests, as it has often partnered with entities that encourage the provision of various services to humanity. At the same time, it is important to ensure that the firm has been making sound business decisions, which has increased its share of the market while at same time earning its shareholders a significant amount of returns.

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Abreu, V., & SEPM (Society for Sedimentary Geology). (2015). Sequence stratigraphy of siliciclastic systems: The ExxonMobil methodology: atlas of exercises. Tulsa, Okla: SEPM. Coll, S. (2012). Private empire: ExxonMobil and American power. New York: Penguin Press.