Question

Read the below article and answer the below questions.

a.What is it that a company like Chevron overlooked in making
its decision to invest in Venezuela?
b. If you were responsible for determining the net present value of Chevron’s Venezuela operations, how would you modify the inputs to your calculation if you felt there were greater than anticipated risks?
U.S. companies are writing down more of their assets during the coronavirus pandemic than they have in years. Finance chiefs are reducing the value of company assets such as airplanes, cruise ships and movie theaters in response to changes in consumer behavior that threaten the viability of their business models. "You have assets at least for a period of time generating zero—or close to zero—revenue," said Steve Hills, who heads up the technical accounting consulting unit at Stout Risius Ross LLC, an advisory firm. The 2,000 largest U.S. businesses by market capitalization—from oil companies to airlines and restaurant chains—have been recording higher pre-tax impairments as existing assets and investments produce poor returns amid the widespread economic downturn.
"If businesses can't sell their products or services, the assets they're holding are most likely worthless," said Philip Keejae Hong, an accounting professor at Central Michigan University. Impairment charges totaled $261.7 billion for the first six months of the year, up 187.6% from the $91 billion booked during the same period in 2019. The first-half figure is also 29% larger than the $203.1 billion recorded in all of 2019, according to financial-technology firm New Constructs LLC. The total figure for write-downs in the first half of the year is among the highest for the past 20 years, but lower than such charges in all of 2008, when impairments hit $486.77 billion, and 2015, when they totaled $383.3 billion. Under U.S. accounting rules, companies have to take impairment charges, or write-downs, when the sum of estimated future cash flows from an asset is less than its book value. This applies to tangible assets—such as factories—and intangible assets such as brands or goodwill, which is created when one company buys another for a price higher than the fair market value of its assets.
Write-downs usually mean that an asset has lost some of its value, while write-offs indicate a total loss of value. Oil giant Chevron Corp. impaired all of its $2.6 billion investment in Venezuela for the quarter ended June 30, citing the deteriorating operating environment in the South American country. "Our future capital decisions need to be more robust and more disciplined so that we don't have impairments in the future," Chevron's Chief Financial Officer, Pierre Breber, said. "In this case, we took our book value down to zero," Mr. Breber said, adding that the company aims to reduce impairments going forward. Fourteen of the 20 largest impairments in the first six months were booked by oil-and-gas businesses amid a decline in prices and pressure to reduce carbon emissions.

Answer 1

Chevron did not fully account for Venezuela's financial instability and history of loan defaults, which negatively impacts investments. To modify NPV calculations for Chevron's Venezuela operations, consider increasing the discount rate, reducing expected future cash flows, and incorporating risk management strategies.

Step-by-step explanation:

Factors Overlooked by Chevron in Investing in Venezuela

Chevron overlooked the historical financial instability of Venezuela, specifically the high risk of inflation and the country's history of defaulting on international loans. This poses a significant threat to investors because it can result in returns that are lower than expected if the country cannot manage its financial commitments.

Adjusting Net Present Value Calculations for Greater Risks

To account for the greater risks associated with Venezuela operations, inputs to the net present value (NPV) calculation should be modified. This involves increasing the discount rate to adjust for risk, reducing expected future cash flows to account for economic instability, and incorporating contingency plans for political and social upheaval that could impact the business.

When faced with a situation akin to Chevron's, reflecting on the present discounted value of future benefits and incorporating a risk premium would be critical. Furthermore, considering the difficulties in measuring the value of assets, especially in international contexts, due diligence is necessary to prevent future impairments.