Capital Budgeting Decision-Making

Project Sponsor Needs for Post-Audit Reports

Project sponsors need post-audit reports to assess project performance and determine whether it is a valuable investment. When conducting post-mortem audits, project sponsors prefer to use the capital budgeting methodology used in the initial analysis. The first post defined various post-audit aspects, but did not give specific recommendations. For example, after an audit, define NPV, and IRR. A comparison of expected and actual data is required, but no recommended method for calculating that data is specified. Second, this post only considers the performance of Oasis of the Sea without the performance evaluation of other cruise lines that contain 21 pools, 24 restaurants, 13 retail shops, and 300-foot water slides. It does not identify any potential benefits as well as risks in the operations of these two ships. The recommendation that the firm should use the break-even analysis is an appropriate way of assuring project sponsors of a timeline to recoup their initial investment.

The Royal Caribbean Cruise Line’s Investment in Oasis of the Sea

The Royal Caribbean Cruise Line has realized that it spend a $1.4 billion on Oasis of the Sea which provides a single service to its 5400 passengers whereas it would have spent a third of the amount on a cruise ship with 21 pools, 24 restaurants, 13 retail shops, and 300-foot water slides. The NPV method would be the most appropriate when conducting a pre- and post-audit review of the Oasis of the Sea. It informs the management of Royal Caribbean whether the investment will create value for the investor and the company and in specific amounts (Bazley, Hancock, & Robinson, 2014). The post-audit review should contain details on the risk analysis of Oasis of the Sea and other cruise ships and compare with their corresponding returns. A diverse portfolio reduces the risks associated with an investment. The firm should evaluate its returns by assessing the relative returns throughout the market cycle and any impacts of market conditions on the performance of Oasis of the Sea. The risk-adjusted method is another way of analyzing the risks associated with this investment. Not only does the management consider the returns but also the risks that come along to generate this returns.

References

Bazley, M., Hancock, P., & Robinson, P. (2014). Contemporary Accounting PDF. Boston: CengageBrain.