1. An Analytic Network Process (ANP) Approach to Refining the Hurdle Rate by Factoring in Project Risk Premium: A Case Study of Indonesia National Oil Company.
- Author
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Enggar Puspita, Nina Ratna
- Subjects
ANALYTIC network process ,RISK premiums ,MONTE Carlo method ,PORTFOLIO diversification ,RATE of return - Abstract
This study comprehensively analyzes the optimal hurdle rate, or the Minimum Attractive Rate of Return (MARR), for oil and gas investments in Indonesia's National Oil Company. By incorporating country-specific, industry, and project risk into the calculation of the Weighted Average Cost of Capital (WACC), the study outlines a risk-adjusted methodology to guide investment decisions. The Analytic Network Process (ANP) method and Monte Carlo Simulation employ the lognormal distribution to quantify and analyze risk variables, establishing a project-specific risk premium. The significance of the country risk premium is emphasized, highlighting its role in investment diversification, accurate valuations, strategic decision-making, and effective risk management. The calculated hurdle rate ranges from 10,91% to 15,42%. The study underscores the importance of thorough risk analysis in ensuring sound investment decisions in the global oil and gas industry. It concludes by emphasizing the risks of setting too low a hurdle rate, leading to excessive risk-taking, or too high a hurdle rate, which might preclude potentially profitable investments. [ABSTRACT FROM AUTHOR]
- Published
- 2023