Capital Budgeting Projections

While all of the numbers in a capital budgeting analysis are projections, you would expect that the projections for the initial cost would be fairly accurate, but that is not always the case. For example, the Kashagan oil field in Kazahkstan is the world's largest oil discovery in 30 years. A group led by Exxon Mobil, Royal Dutch Shell, and Total have been involved in developing the project, at a budget of $10 billion. However, the cost of the project is now at least $50 billion. Similarly, Chevron started the Gorgon LNG plan in Australia with a budget of $20 billion. The cost of that project is now $54 billion. Remember, all cash flows for a project under consideration are projections. This is one reason scenario analysis is so important because it permits us to examine what can happen if we are wrong.