The effect of crude oil price volatility on capital budgeting practices for petroleum companies

This research proposal aims to investigate the effect of crude oil price volatility on the capital budgeting practices of petroleum companies, with a case study on Aramco Saudi. The study will analyze the impact of price volatility on budgets, capital budgeting techniques, and budgetary policies. The research objectives include determining the effect of crude oil price volatility on Aramco Saudi's budgets, investigating the applied capital budgeting technique, assessing the effectiveness of the applied methods, and evaluating the company's efforts to reach its 2020 Vision. The study will contribute to the understanding of capital budgeting techniques in crude oil-dependent economies.

Running head: RESEARCH PROPOSAL 1
The effect of crude oil price volatility on the capital budgeting practices for petroleum
companies case study on Aramco Saudi
Name
Institution
Date

RESEARCH PROPOSAL 2
Contents
Research proposal............................................................................................................................5
Title..............................................................................................................................................5
Introduction..................................................................................................................................5
Problem statement.......................................................................................................................5
Research objectives.....................................................................................................................7
Research questions.......................................................................................................................7
Scope of the study........................................................................................................................8
Anticipated Significant contribution............................................................................................8
Feasible limitation.......................................................................................................................8
Thesis structure............................................................................................................................8
Summary of the Chapter..............................................................................................................9
References......................................................................................................................................10
Literature Review..........................................................................................................................12
Introduction................................................................................................................................12
Research Background................................................................................................................12
Historical Development of Research in the Area......................................................................13
Relevant Theories in the Research............................................................................................14
Review of Recent Research in the Area....................................................................................16
Capital budgeting...................................................................................................................16

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Capital asset pricing model CAPM.......................................................................................17
Net Present Value..................................................................................................................17
Net Present value for Foreign Investment.............................................................................18
Budgetary policies.................................................................................................................19
Participative Budgeting.........................................................................................................21
Beyond Budgeting.................................................................................................................21
Capital Budgeting for Long-term Infrastructures Projects....................................................22
Risk budgeting.......................................................................................................................22
Throughput analysis...............................................................................................................23
Discounted Cash Flow...........................................................................................................24
Internal Rate of Return..........................................................................................................24
Payback Period......................................................................................................................25
Crude oil Price Volatility in Saudi Arabia.............................................................................26
Research Gaps Identification and Deliberation.........................................................................30
Conceptual Model Development...............................................................................................31
Hypothesis development............................................................................................................32
Chapter's Summary....................................................................................................................32
References......................................................................................................................................33
Methodology..................................................................................................................................39
Introduction................................................................................................................................39

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Background of The Research - Objectives, and Questions.......................................................39
Research objectives...............................................................................................................39
Research questions.................................................................................................................39
Basic Research Method Selected and Rationalization...............................................................40
Population, Sample, and Respondents.......................................................................................41
Research instruments - Questionnaires Design and Development............................................42
Unit of Measurement and the Measurement of Variables.........................................................42
Pilot Study and The Reliability and Validity Test - Multiple Regression Test.........................43
Method of data analysis.............................................................................................................43
Summary of the chapter.............................................................................................................45
Research timetable.....................................................................................................................45
References......................................................................................................................................46
Research proposal
Title

RESEARCH PROPOSAL 5
The effect of crude oil price volatility on the capital budgeting practices for petroleum
companies case study on Aramco Saudi.
Introduction
The goal of the firm is to maximize shareholders’ wealth. In order to achieve this target, a
complex decision-making process required. The first element of this complex process is the
investment decision, the utilization of the current investment opportunities, to provide a better
future return for the firm. The second element is the financing decision, which supports the
investment decision, by deciding on possible sources of funds, which can be utilized in profitable
investments opportunities. The third element is the dividend decision, which supports the
financing decision, by deciding on the optimal balance between retained earnings, and
stockholders’ interest in the form of distributed dividends. An interdependent approach to
capital budgeting has been presented by Spies (1974) as an answer to this complex process. The
model defines the optimal capital budget as a function of dividends, short-term investments,
long-term investments, debt financing, and equity financing. The model performs well and yields
several insights into the capital budgeting process. When the capital budget is out of equilibrium,
dividends, and long-term investment quickly approach their equilibrium values. Short-term
investment takes up slack by compensating for lagging adjustments of other components (Spies,
1974).
Problem Statement
The capital budgeting decision process can mold the firm’s future opportunities, and it is
one of the key decision areas confronting contemporary financial management issues. (Gitman &
Forrester, 1977). Capital sources can be provided through many avenues, and each of these
avenues has its costs. The sources of capital can’t be viewed separately, each source is affected
by the other. Equity capital has been found to be difficult to value, due to the ownership interest

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and residual right attached to it (Dickerson, 1963). Net present value (NPV) method is very
popular and widely used by firms in capital budgeting in practice. The main disadvantage of the
NPV approach is that it lacks flexibility and the firm need to make the decision today in spite of
uncertain factors the project faces in the future. The way to address such deficiency is to
incorporate real options tool to supplement the NPV criterion. Although survey literature
indicates that firms seldom use real options method in capital budgeting due to lack of
knowledge/skill and lack of support of top executives, using real options technique to
supplement NPV method in capital budgeting can be the future trend (Chen, 2012). The
Discounted Cash Flow model (DCF), is another tool used for capital budgeting. The Discounted
Cash Flow assumes that managers can make a decision, implement it, but with limited
capabilities to alter that decision. The methodology used to implement this technique is to
estimate the future net cash flows over the supposed life of the project and then discount those
cash flows at the appropriate discount rate. In truth, the Discounted Cash Flow model is perfectly
appropriate only when the future cash flows are known with certainty. In stable circumstances,
the results of applying this model will be acceptable. This model has the shortcoming of failing
to capture the value of flexibility (Schubert & Barenbaum, 2007).
As recent sharp price volatility of crude oil price, Aramco Saudi as a major crude oil
company in an crude oil-dependent economy of the Kingdom of Saudi Arabia is affected. Based
on the new strategic direction for vision 2020 for Aramco Saudi “We’re going to be the world’s
largest integrated energy and chemicals company by 2020. To achieve this goal, we are currently
undergoing a transformation program, expanding our upstream and downstream operations and
diversifying into renewables, nonconventional resources, and environmentally beneficial
technologies. We’ve embarked on a series of mega-projects, ranging from expanding crude oil

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and natural gas production capacity to new refining, petrochemical, and marketing
ventures”( Aramco,2014). The changes that may result of this price volatility on the capital
budgeting process for the company can’t be marginalized, therefore understanding this volatility;
its effect on the capital budgeting process; and the possible techniques that can be implanted to
mitigate this effect is needed.
Research Objectives
The recent volatility of crude oil prices can have an effect on the capital budgeting
decision of petroleum companies.
• To determine the effect of crude oil price volatility on the budgets of Aramco Saudi.
• To determine the applied capital budgeting technique for Aramco Saudi.
• To investigate the applied budgetary policy, used by the managers for project assessment.
• To Assess the effectiveness of the applied capital budgeting methods on the Aramco’s efforts
to reach its 2020 Vision.
Research Questions
• What is the possible effect of crude oil price volatility on the budgets of Aramco Saudi?
• What is the applied capital budgeting technique(s) for Aramco Saudi?
• How do managers evaluate projects, based on the applied budgetary policy in Aramco Saudi?
• How effective is the currently applied capital budgeting methods on the Aramco’s efforts to
reach its 2020 Vision?
Scope of the Study
The study will be limited to Aramco Saudi, the evaluation of the company for the past
five years will be implemented to understand capital budgeting techniques, whether the volatility
of crude oil price has an effect on the implemented capital budgeting techniques.

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Anticipated Significant Contribution
Investigate the effect of crude oil price volatility on capital budgeting techniques
implemented in Aramco Saudi Crude oil Company based in the Kingdom of Saudi Arabia.
Aramco Saudi has been chosen as a case study for this research, to enable studying its various
projects capital budgeting techniques. The company has downstream upstream projects,
diversified portfolio of business operations, and being the main company for crude oil production
in an crude oil-dependent economy –Kingdom of Saudi Arabia – with the current volatility of
crude oil, this case study can contribute to the body of knowledge of capital budgeting
techniques for crude oil-dependent economies.
Feasible Limitation
The research will be limited for public data available from the year 2015-2010 only
through the company’s website. Time constraints regarding interviewees schedule, and any
possible clash of schedules that can’t be mitigated.
Thesis Structure
This thesis is made up to of three main parts which the introduction, literature review and
the methodology. The introduction has the rationale of the projects which include the problem
statement, research objectives, hypotheses and the research questions. The literature review has
the previous studies conducted in the past and the gap in the body of language. The methodology
consists of the techniques which will be used to collect and analyze the data
Summary of the Chapter
In summary, this section has introduced the study by addressing the problem which the
research will be focusing on. The impact which the crude oil price volatility has of the capital
budgeting in Armco Saudi which is one of the crude oil supplying companies in Saudi Arabia.
The research objectives and research questions of the have been outlined based on what the

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research is intended to achieve such as to give the reality of how the crude oil price volatility
affect the capital budgeting. The concept of the capital budgeting model has been outlined in this
section but will be developed in the next section. The scope of the study is that it will be limited
to crude oil price volatility, capital budgeting, and Saudi Arabia specifically the case study of
Armco Saudi. The study will address some gaps in the body of language because very few
studies have focused on the price volatility impacting the capital budgeting or at least the public
investment decision -making. the study is limited on time to conduct the interview and the
number of the previous years studied. The budgetary policies of the companies to a large extent
affect the capital budgeting techniques and the third hypothesis will be assessing the budgetary
policy of the company.
References
Aramco, Annual Review 2013, http://www.aramco.com/content/dam/Publications/Annual
%20Review/AnnualReview2013/2013AR_Expanding_Our_Portfolio.pdf, date of
Publish: February 24, 2014. Date of Access :January,12,2015.
Braun, V. and Clarke, V. (2006) Using thematic analysis in psychology. Qualitative Research in
Psychology, 3 (2). pp. 77-101. ISSN 1478-0887

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Chen, J. (2012). Adding Flexibility for NPV method in capital budgeting. Global Confidence on
Business and Finance Proceedings, 7, 49–57.
Dickerson, P. J. (1963). Capital Budgeting--Theory and Practice. California Management
Review, 6, 53–60.
Damodaran, a. (2007). Return on capital (ROC), return on invested capital (ROIC) and return on
equity (ROE): measurement and implications. New York University: Stern School of
Business, 1–69. doi:10.2139/ssrn.1105499
Feibel, Bruce J. Investment Performance Measurement. New York: Wiley, 2003
Galbraith, J., 1973. Designing Complex Organizations. Addison-Wesley, Reading, MA
Gitman, L. J., & Forrester, J. R. (1977). A Survey of Capital Budgeting Techniques Used by
Major US Firms. Financial Management, 6(3), 66–71.
Schubert, W., & Barenbaum, L. (2007). Real Options and Public Sector Capital Project
Decision-Making. Journal of Public Budgeting Accounting Financial Management,
19(2), 139–152.
Lin, Grier C. I.; Nagalingam, Sev V. (2000). CIM justification and optimization. London: Taylor
& Francis. pp. 36
Smit, H.T.J., Ankum, L.A., 1993.Areal options and game-theoretic approach to corporate
investment strategy under competition. Financ. Manage. 22 (3), 241–250.
Simerly, R.L., Li, M., 2000. Environmental dynamism, capital structure and performance: a
theoretical integration and an empirical test. Strategic Manage. J. 21, 31–49.
Spies, R. R. (1974). The Dynamics of Corporate Capital Budgeting. Journal of Finance, 29, 829–
845.

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Zhong, L., & Jiang, C. (2011). Delegated portfolio management under active risk budgeting. In
2011 2nd International Conference on Artificial Intelligence, Management Science and
Electronic Commerce, AIMSEC 2011 - Proceedings (pp. 2922–2926).
Zhu, K., Weyant, J.P., 2003. Strategic decisions of new technology adoption under asymmetric
information: a game-theoretic model. Decision Sci. 34 (4), 643–675.
Literature Review
Introduction
In this section, the literature related to the study question will be analyzed to find out
what other researchers have done in the past and how they concluded their researches. The topic
on the capital budgeting has been researched by many researchers because many industries
usually have a problem in choosing the most capital budgeting techniques because all the

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developed model have limitations (Abor,2017). the case becomes more difficult especially when
the company is dealing with the volatility of the price. The crude oil companies are the most
affected by the price volatility because there are very many factors which comes into play and
which determines the price of the crude oil. These factors are not fixed and the change quacking
making the capital budgeting of the crude oil companies to be difficult. Some researchers who
will be reviewed this section have conducted the research on the best capital budgeting
techniques which the crude oil companies can use taking the price volatility of the crude oil into
account. However, the problem persists because even after companies applying those techniques,
the crude oil companies still venture into projects which prove unprofitable and, in some cases,
put the companies in the risk of been bankruptcy (Aldaarmi et al, 2015). This section will focus
on the theories of capital budgeting as well as review different capital budgeting model and
where they have been used. This will enable us to discover the strength and the weakness of
those model and then hence find the gap which exists in the body of knowledge.
Research Background
Capital budgeting is important to managers because it helps them to make the informed
and proper decision so that they can venture into certain investment. The process has to take into
consideration the future cash inflow and outflow of the business for the technique to be
considered as reliable and quite accurate. The main problem arises where the volatility of the
price experiences to the extent that it becomes impossible to predict the future price of the
product. The price volatility makes it had for the company accountants to determine the future
cash inflow of the business (Ahmad,2017). The worst case occurs when the company
accountants assume that the price of the product will increase and the end up predicting the
future cash inflow which is higher that which will be generated. this cause the company to be
unprofitable to the extent which the investors fail to get the equity returns. The investors are the

RESEARCH PROPOSAL 13
most important stakeholders in the company and hence the managers have to ensure that their
wishes and expectations are met. most of the managers use the payback period capital budgeting
technique because it is the easiest method (Al Hudithi,2017). However, this method is never
accurate because it is based on many assumptions which can be applied in the crude oil
companies like Armco Saudi where the price is highly volatile. The throughput analysis has been
used in a few companies and has proven to be the best technique of capital budgeting.
Nevertheless, most of the companies do not use this technique because it is complex and
considers every aspect of the company. This method is very accurate because all it considers the
cost as the operating cost and the profit has to be maximized to pay for these expenses (Su et al.,
2018). The Armco Saudi has vision 2020 which is aiming at ensuring that the shareholders are
satisfied by the performance of the company and how the management of the company id
managing resources. This vision might fail to be achieved considering the danger which Armco
company in the aspect of the crude oil price volatility (Alkhamis et al., 2017). The sad part of the
story is that the price of crude oil in most cases is fluctuating downward meaning that there is a
probability that the price of crude oil will go down.
Historical Development of Research in the Area
The research on capital budgeting has been conducted for the last 80 years (1940-2019)
through various methods. In most of the studies, the empirical method was used to analyze the
data. Some of the researchers were conducted by the government researcher while most of them
were done by the scholar. In more than 50% of the researcher were case studies where only the
secondary data was used in the study without having primary data to confirm the secondary data.
The government researchers used the companies’ financial data of about 20 years to study the
capital budgeting techniques which those companies have been using.

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Most of the scholar-researchers were carrying out primary data collection to find out
whether the secondary data is consistent with the reality on the ground. However, the studies
concerning the impact which the volatility in price has on capital budgeting have a history of
about 20 years because most of the researches in the past have not been so keen on the effect
which price volatility has. Since the start of the 21st century, the volatility of the prices of good
has been experienced in many countries because of globalization which has expanded
international trade (AlMotairy, 2016). It is no longer the case where the price of good was
determined by the market forces within countries but with the advancement of technology, an
action happening in one country can affect the price of products in far distance country ibn short
period of time. This has brought a difficult time for the managers and hence a few researchers
have conducted studies on the impact of volatility on the capital budgeting. The study on the
volatility of the price of crude oil impacting the capital budget is scarce and has only been done
for the last 10 years (Al-Maamary et al., 2017). This is because the price of crude oil had for a
long period of the time constant until there was great economic depression in the year 2008 (Al
Hudithi,2017). After many countries recovered from the great depression, the price of crude oil
has been fluctuating greatly making it very difficult for the managers to determine which is the
best method they can use for capital budgeting.
Relevant Theories in the Research
When it comes to the capital budgeting there are many theories which are developed by
the researchers. The most important of them is that the main aim of the company is to make a
profit so that to create as much wealth as possible for the shareholders. For the company to make
profit then project which will be profitable to the company have to be selected (Al-Mutairi et al.,
2018). For this reason, the capital budget has to be used to select the appropriate project which
the company has to invest in so as to meet the expectation of the shareholder who is the owners

RESEARCH PROPOSAL 15
of the company. The capital budgeting process is quite complex because the managers have to
ensure that the future uncertainties are covered in the capital budgeting techniques. In case the
managers ignore future uncertainty, then the investment appraisal is unreliable and will not be a
true reflection of indicating the profitability of the company (Adam et al., 2017).
There are many techniques which the managers have been utilizing in capital budgeting
which include, throughput analysis, discounted cash flow method, net present value (NPV),
internal rate of return and payback period. These techniques have different complexities and the
more complex certain techniques are, the more it is likely to be accurate. In most cases, the net
present value and the internal rate of return (IRR) are used together but the NPV is considered
paramount even which the IRR seems to give contradicting conclusion (Araujo et al., 2016).
When the net present value of the project is found to be positive then it means that the company
will be profitable. However, this model cannot be fit in cases where the price is volatile since the
model is not flexible. Basically, the capital budgeting models are not fully capable of appraising
the investment for the managers to make the most informed decisions (Aregbeyen&
Fasanyan,2017). Despite which method is used in capital budgeting the crude oil price volatility
has to affect it because the volatility in the prices affect the revenue which the company is
expecting in the future and which is subject to price fluctuations (Benramdane, 2017). The
capital budgeting of the company is usually governed by the budgetary policy which governs the
allocation of the resources in the company.
Review of Recent Research in the Area
Capital budgeting
Capital budgeting can be affected by changes in demands over the time horizon. Capital
budgeting using issuing new equity as a source of finance, Implies that industries anticipating
positive shifts in demand in the near future, as a result issuing more equity is the appropriate

RESEARCH PROPOSAL 16
financing method to cater for such demand shift (Buller& McEvoy,2016). Market timing implies
that industries anticipating positive demand shifts in the distant future should issue less equity, to
avoid exposure to undervaluation (Chittenden& Derregia,2015). The relationship between
demand shifts and stock issuance has been found to be: new listings and equity issuance respond
positively to demand shifts up to 5 years ahead, and negatively to demand shifts 5 to 10 years
ahead.(DellaVigna & Pollet, 2007)
In the context of project appraisal, Ross et al. demonstrate a generic discount rate should
be discouraged in practice. In theory, however, a generic discount rate is justified through M&M
proposition III. Dayala (2010) has investigated the discrepancy and finds that consistently
selecting positive NPV projects with individual risk-adjusted discount rates will always result in
an excess return over the generic hurdle rate, hence value creation. Yet, a generic discount rate
for individual project appraisal can only be justified if and when the generic discount rate is
identical to the individual discount rate; that is in a context of projects being perfectly correlated
and of an identical risk class only (Araujo et al., 2016). In all other cases, a generic discount rate
could lead to value destruction. M&M Proposition III is misguided (Dayala, 2010).
Budgeting is considered to be one of the most important management tools to steer the
organization, evaluate its performance and motivate its people. Capital budgeting decisions
affect the profitability of a business organization. The paper focused on the efficiency of capital
budgeting. Over-investment or under-investment is inefficiency (Crossman & Fischer, 2016).
Using Chinese listed company's data, when the majority stockholder has more stock, the more
inefficiency of capital budgeting has been concluded. Also, the negative relationship between
leverage and the inefficiency of capital budgeting has been established (Davoudi, 2018). The

RESEARCH PROPOSAL 17
inefficiency of capital budgeting decreases as the number of independent director increases (Wu,
2011).
Capital asset pricing model (CAPM)
The empirical evidence presented by Da, Guo, & Jagannathan (2012) against the capital
asset pricing model (CAPM) based on stock returns, proposed that using CAPM for estimating
the cost of capital does not invalidate its use as capital budgeting model for projects in the
making. It can be attributed to the fact that stocks are backed not only by projects in place
(Decisions,2015). The presence of options to modify current projects and undertake new ones,
the expected returns on stocks does not have to satisfy the CAPM even when expected returns of
projects pass CAPM criteria for financing the specific project. Our findings justify the continued
use of the CAPM by firms in spite of the mounting evidence against it based on the cross-section
of stock returns. (Da et al., 2012)
Net Present Value
Net present value: is defined as the sum of the present values (PVs) of the individual cash
flows. In the case when all future cash flows are incoming (such as coupons and principal of a
bond) and the only outflow of cash is the purchase price, the NPV is simply the PV of future
cash flows minus the purchase price (which is its own PV) (de Andrés et al., 2015). NPV is a
central tool in discounted cash flow analysis and is a standard method for using the time value of
money to appraise long-term projects (Domanski et al., 2015). Used for capital budgeting, and
widely throughout economics, finance, and accounting, it measures the excess or shortfall of
cash flows, in present value terms, once financing charges are met. ( Lin et al., 2000).
Advantages: the time value of money, easy to calculate, and Shows the risk associated with all
future cash flows. Disadvantage: it assumes that interim payments received during the life of the
project can be invested at the discount rate used in the calculation (Donovan & Corbishley,

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2016). For determining expected annual cash flows and the expected period of benefit, subjective
data is used. The outcome is shown as a rand value and not as a percentage; which are usually
easier to understand (Feibel, 2003).
Net Present value for Foreign Investment
The usage of the theoretically correct net present value method decreases with the
political risk in the host country, and that the use of the Payback method increases with the
political risk (Chittenden& Derregia,2015). also in the presence of capital market imperfections,
unsystematic and country-specific political risks are important (Ghenimi et al., 2018). Due to the
fact that these risks are difficult to estimate (rendering high deliberation costs) managers are
inclined to use simple rules of thumb for their capital budgeting decisions (Araujo et al., 2016).
Research results partly explain why surveys find that alternative methods such as the Payback
method are frequently used despite their theoretical drawbacks (Holmén & Pramborg, 2009).
The traditional methodology for determining whether or not such an investment should
be made is known as the discounted cash flow method (Al Hudithi,2017). This method,
unfortunately, does not capture efficiently the benefits of flexibility that often accompany capital
budgeting decisions (Graham & Harvey,2002). Using the framework of financial theory,
employing real options modeling in public sector capital decision-making has been found to
improve the efficacy of capital budgeting decisions.(Schubert & Barenbaum, 2007b)
The standard textbook formula for computing the present value of future random cash
flow - the discounted expected value – has been found to be formally incorrect and can generate
significant errors when used to compute present values. The standard error found in the standard
text PV formula has been theorized to be more severe for projects that run beyond 5 years
(Jarrow, 2014).

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Including real options for decision makers for capital budgeting, empowered the decision
makers to eliminate projects that didn’t perform up to standards at an early stage (Guerrero-
Baenaet al., 2015). The study by Denison (2009) Using experimental methods to explore whether
incorporating real options into net present value analysis can reduce escalation of commitment,
or the tendency of decision makers to continue to commit resources to a project after receiving
negative feedback (Jahfer & Mulafara,2016). Findings indicated that users of real options display
less escalation of commitment than do users of net present value analysis alone. The main result
demonstrates that the use of real options in capital budgeting can affect the behavior and
decisions of the user even in an experimental setting that controls for the informational
advantage of using real options(Denison, 2009).
Budgetary policies
The impact of the institutionalization of governance and budgetary policies on the
accountability of organizational actors from an institutional and critical realism perspective has
been studied by Mutiganda (2013). The study has been based on the framework developed by
Burns and Scapens (2000) to critical realism. Accountability practices have been reported to be
dependent on whether the institutionalized policies have reduced or increased the gaps between
the real, the actual, and the empirical domains of the reality of the organizational actors involved
(Kengatharan,2016). The governance policy that prevails at a given domain of reality, has been
reported to be a factor to affect the accountability practices (Araujo et al., 2016). The application
of budgetary information as a tool of governance and accountability in the empirical field of the
study, cannot be taken for granted (Mutiganda, 2013).
The nature of the prescreening process has not been thoroughly investigated. However,
evidence suggests that some screening takes place during proposal budget development.
Researchers have identified departments responsible for the budget, 39 percent of the budgets

RESEARCH PROPOSAL 20
were prepared by engineering, 33 percent by accounting, 17 percent by finance or budget
committees, while 11 percent were considered divisional responsibilities (Kristjanpoller &
Concha,2016). It may be inferred from this finding that engineers and accountants are more
involved in the prescreening process than personnel in the finance department (Araujo et al.,
2016). An important analytical issue is the estimation of cost-benefit data. It has been found that
firms typically classified projects, and user acceptance and selection criteria that depended upon
these classifications (Lee et al., 2017). Generally, the finance department is not responsible for
budget development during the screening process. Finance, however, appears to control selection
(Muksherjee & Henderson, 1987).
Uncertainty is defined as the gap between the information currently available and the
information required to make the decision (Galbraith, 1973). A condition of uncertainty usually
exists in capital budgeting because investment decisions, by definition, involve uncertain
outcomes that in the long run are important to firm survival and about which complete
information is unavailable (Zhu and Weyant, 2003; Simerly and Li, 2000; Smit and Ankum,
1993). Also consistent with previous research is that industry has an impact on capital budgeting
practices. More specifically, firms in the financial services industry and, to a lesser extent, the
building, construction, and utility industries appear to find sophisticated capital budgeting
practices (SCBP) more important and useful than the extraction, manufacturing and non-
financial services industries (Masri & Abdulla,2018). The results indicate that it is more than the
sole uncertainty that affects the importance and use of sophisticated capital budgeting practices
(SCBP). One reason may be that some industries have characteristics (that make administrative
innovations like GT and/or ROR more suitable to implement (Mukherjee et al., 2016). Another

RESEARCH PROPOSAL 21
reason may be that these industries are used to dealing with uncertainty through option-like
analyses (Verbeeten, 2006).
Participative budgeting
The process by which managers have an influence on the setting of their budget goals,
participative budgeting (PB), has been researched extensively since the 1960s. The empirical PB
studies identified (1) the antecedents or determinants of PB, (2) the impact PB has on mental
states and performance and (3) PB's effects on the existence of budgetary slack (Myers,1974).
Summing up the findings, it has to be noted that while the informational role of PB in enhancing
subordinate performance is generally established, the results relating to reductions in information
asymmetry as well as PB's motivational effects remain ambiguous (Prümmer, Frey, Schentler,
Williams, & Motwani, 2011).
Beyond budgeting
Beyond Budgeting has been proposed as an influential idea that will reinvigorate
management accounting contribution in business operation and performance. It is claimed that
the traditional system has lost relevance with the modern business environment and is no longer
satisfying the needs of managers (Nobanee,2017). Budgets have been ingrained in the culture of
business since their inception in the 1920s and managers will find it extremely difficult to
radically shift to a system without budgets. The implications of a Beyond Budgeting system are;
performance measures relative to competitors and a decentralized organization structure
(Nurullah& Kengatharan,2015). Alternatives such as the Better Budgeting techniques may be
more favorable to management who desires a formal planning and control system. The Beyond
Budgeting concept is still in its infancy and requires further development and practical
implementation. (Goode & Malik, 2011)

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Capital budgeting forlong-terminfrastructures projects
A new empirical insight on the capital structure of project-financed Liquefied Natural
Gas (LNG) infrastructures and gas pipeline projects has been provided, by using data relating to
projects whose financial close occurred between June 2004 and March 2011. Most results are
consistent with the basic view of risk-averse funds suppliers (Prasad,2018). Especially, the
projects located in risky countries and larger projects tend to exhibit lower debt ratios and less-
concentrated equity ownership. In addition, regasification projects appear to have more diluted
equity ownership. Methodological issues raised by the financing of these projects are also
examined from a capital-budgeting perspective (Rahma et al., 2016). In particular, the equity
residual method, usually used by industrial practitioners to value these projects, should be
adjusted (Pierru, Roussanaly, & Sabathier, 2013). Liquefied Natural Gas projects are the current
new strategic venture by Aramco (Aramco,2014). Understanding the applied method for LNG
projects capital budgeting is important because Natural Gas considered to the more efficient
alternative source of energy for crude oil.
Risk budgeting
The impacts of risk budgeting on managers' optimal effort decision and on investors'
contract design has been studied by Zhong &Jiang( 2011 ). The results indicate that managers
spend a low level of effort when they are constrained than when they are unconstrained
regardless of whether the effort is observable or not, and the effort managers spend decreases as
the constraint becomes tighter (Riley et al., 2017). However, active risk budgeting has negligible
impacts on investors' contract design. In addition, the contract sharing coefficient without risk
budgeting restrictions is still optimal in the scenario where the active risk budgeting is present
and the effort is observable (Rossi, 2015).

RESEARCH PROPOSAL 23
Throughput analysis
Throughput analysis is one of the methods that is used in capital budgeting. The
technique is so complex that many managers prefer not to use it but many economics have
proposed it as the best capital budgeting technique( Ruiz & Zuniga-Jara, 2018). Unlike many
other techniques like the net present value the technique does not consider the cash flow of each
separate project but it analysis the total throughput of the company. throughput is a word which
is used to represent the value which one gets after subtracting the operation cost from the
revenue generated by all the projects of the company (Sari & Kahraman,2015). This technique is
more reliable because in most cases the companies have a different project which are related and
throughput analysis considers them all as one entity which gives a clearer picture of how the
future will be (Ahmad,2017). The bottleneck operation is enhanced such that to increase the
value of the total throughput the projects have to pass through the bottleneck which us the
resource that the company has (Saidu, & Musa, 2017).
It is not in all cases that the bottleneck operations have to increase the value of total
throughput but ins some cases it is applied to reduce the operating expenses of the company
which indirectly increase the through. In other cases, the operation is done to mitigate the risks
which the company is likely to face especially the risks which are associated with the fluctuation
of the market prices of the products (Shivaani et al. 2017). There are some companies which
apply the throughput analysis for the purpose of fulfilling the legal requirement of the company
by the state, shareholders and even the lenders (Solomon, 1956). Throughput analysis can be
used by the management in the cases where the price of the products is volatile (Ghenimi et al.,
2018). The model is fit because it takes into account all the operation of the company instead of
reviewing just the project which is experiencing the price volatility of the products or services.

RESEARCH PROPOSAL 24
Discounted Cash Flow
Discounted cash flow is another model which is used in the capital budgeting. The model
is used to find out the amount of money which the investor would receive from a project based
on the presents value of the money (Su et al., 2018). The idea is that the dollar is weaker
tomorrow than today and for that reason, the discount rate is applied to find the amount of money
if it was equated to the present values (Sari & Kahraman,2015). The main challenges which the
discounted cash flow encounters are to determine which cash flow in the project to be discounted
(Saidu, & Musa, 2017). This challenge occurs especially when the project is complex and
dividends are expected to be paid to the shareholders. In the case when the discounted cash flow
analysis is based on the dividends paid to the investors especially the minority shareholders, it
becomes easy for the manager to know that the value of the stock is low (Tahir & Anuar,2016).
The model is not fit for the complex investments and it becomes even more challenging when the
price of the products is volatile (Ghenimi et al., 2018). The volatility makes it hard for the
manager to know which will be the future cash flow of the project because the revenue generated
in the future can hardly be determined by the current revenue generated (Zhao et al., 2016). For
these reasons, the model is fit when used in a private company where the investment is less
complex and the price of the products is stable.
Internal Rate of Return
Internal rate of return is not quite a model but a metric used in capital budgeting. This is
the return rate by which the net present value of the company is equal to zero (Ghenimi et al.,
2018). The NPV formula is used to calculate the internal rate of return and by the nature of the
formula, it is hard to make the IRR as the subject of the formula and hence the method of trial
and error is used. The higher the internal rate of return is the higher the present value of the
company is expected to be and hence the more desirable it is to venture into that project (Zhang

RESEARCH PROPOSAL 25
et al., 2016). When the company has several projects which it has to choose from, then the
internal rate of return can be used to consider which of the investment is the best (Saidu, &
Musa, 2017). This is done especially when the cost of the investment is the same and the
company is not willing to complex model to analyses all the investments. However, the
managers decide to look into the net present value then the outcome of the NPV is taken as
paramount (Zhang, 2017). This is because the managers can analyze several investments’’
internal rate return and net present value and find that the investment with the highest IRR has
negative NPV while the one with a lower IRR had highest positive NPV (Lee et al., 2017). In
such a case, the investment with the highest positive prevent values is considered the most
desirable even if the NPV is not the highest (Zhu & Singh,2016). The advantage of the internal
rate of returns is that it can be used to analyze the projects even when the price of the products is
highly volatile.
Payback period
The main aspect which the managers are always willing to know is the amount of time
which the investment will take to cover the cost of investments (Saidu, & Musa, 2017). This is
sometimes called the breakpoint of the company beyond which the company starts making a
profit. The less the payback time the investment is, the more desirable the investment is because
it will soon start making a profit and the vice versa (Zhang et al., 2016). Basically, the payback
time is given by the cost of the investment divided by the annual cash flows (Waheed et al.,
2018). The main challenge which this method has is that unlike other models like the net present
value, discounted cash flow and the internal rate of returns the model does not consider the
present value of the future cash flow. This results in giving an unreliable figure because the
revenue which will be generated in the future will be weaker than the revenue generated today
(Zhang et al., 2016). The model completely unreliable when it comes to the economies where the

RESEARCH PROPOSAL 26
price of the good is highly volatile because it becomes hard to predict future cash flows
(Weingartner,1969).
Crude oilprice volatility in Saudi Arabia
The crude oil price volatility is not something new because it started around 1973 when
the non-OPEC suppliers started supplying crude oil and this resulted in the moderation of prices.
The price of the crude oil before then was quite higher because the OPEC cartels were cutting
production so as to create high demand rising and keeping the price of the crude oil high (Zhao et
al., 2016). The supplies by the non-OPEC suppliers was a good step since they moderated the
price of the crude oil for a long time until these suppliers started declining. The price of crude oil
in 2001 in Saudi Arabia was $20 while by just before the time of the economic depression in
2008, the price rose to $140 dollar (Chittenden& Derregia,2015). After the economic depression,
the price dropped to $40 per barrel and this was huge fluctuation in just a short period of time
(Sari & Kahraman,2015). After the economic recession, the price went down to $120 in the year
2014 when the economy of the world was recovering. The price of the crude oil Saudi Arabia has
never again been stable, not because of the collapse of the economy but because of crude oil
been generated from various source (Su et al., 2018). This makes it hard for the OPEC to control
the price of the crude oil because when they cut the production with the intention of increasing
the price of the crude oil, they find that other sources are meeting the market demand (Zhang et
al., 2016).
Another aspect which is bringing about the volatility of the crude oil prices is the
decision of the client governments like the US. In 2018, the US president, Donald Trump,
declared that the US will not be purchasing the crude oil from Iran (Waheed et al., 2018). This
was great news for Russia and Saudi Arabia who met to decide how the supply of the crude oil
will be like in 2019 with Iran been limited to the market. This cause the price of the crude oil to

RESEARCH PROPOSAL 27
rise while Iran lowered the price so as to attract more clients to cover the sale, they would lose by
not supplying in the US. However, the most important thing that President Trump was hoping is
that Saudi Arabia and Russia will not cut down the supplies (Waheed et al., 2018). The volatility
of the crude oil prices in Saudi Arabia have caused the companies to restructure their capital
budgeting such that they can be flexible to consider the fluctuation. In the past, the crude oil
supplying companies in Saudi have been using a simple model of capital budgeting like the net
present value to find out if the investment is desirable to invest in (Su et al., 2018). However, it is
no longer possible to use the simple model because the determination of the future cash flows is
difficult considering how the prices are unpredictable.
Authors Year Research
objectives
Research
methods
Research
Findings
Suggested
future research
Waheed, R., Wei,
C., Sarwar, S., &
Lv, Y
2018 To find the
impact of
crude oil price
on the stock
market
Questionnaires
and interviews
The crude oil
price has effect
on stock market
of crude oil
Study on the
impact of crude
oil price on
investment
decision making
Zhu, Q., & Singh 2016 To find out the
impact which
the crude oil
price volatility
has on
strategies of
investments in
crude oil in the
northern part
Secondary
source data and
interviews
The crude oil
price volatility
has great impact
on investment
strategies
Study on the
impacts of crude
oil volatility on
the same in
Europe

RESEARCH PROPOSAL 28
of American
Zhang, W., Li, X.,
Shen, D., &
Teglio, A.
2016 To find the
impacts of the
price volatility
on investment
returns
Secondary data
collection and
random
questionnaire
Price volatility
affect the returns
depending on the
direction of price
fluctuation
The impact of
price volatility
on important
products like
crude oil.
Zhao, L., Zhang,
X., Wang, S., &
Xu, S.
2016 To find the
effect of the
crude oil price
on inflation in
china
Interviews The inflation is
determined by
the crude oil
price because
economy depend
on
transportation.
Study on the
impact of crude
oil price
volatility on the
performance of
other companies
Tahir, M., &
Anuar, M. B. A.
2016 The
determinants
of the capital
budgeting in
Pakistan
Random
questionnaires
and secondary
source
Price volatility
was considered
as the major
determinate of
capital budgeting
techniques
Study
determinants of
capital budget
techniques in
highly volatile
companies.

RESEARCH PROPOSAL 29
Shivaani, M. V.,
Jain, P. K., &
Yadav, S. S.
2017 To find out the
most
commonly
used capital
budgeting
technique in
India
Interviews and
secondary
source data
The most
commonly use
techniques in
India is CAPM
Study of the
capital
budgeting
techniques in
crude oil-
dependent
economies
Rahma, E., Perera,
N., & Tan, K.
2016 The impact of
the crude oil
price volatility
on the budget
of the
government of
Sudan
Secondary
source data
Crude oil shock
prices cause the
budget of the
Sudan
government less
reliable.
Study on crude
oil price shock
on the crude oil
producing
companies.
Nobanee, H. 2017 To find out the
most efficient
capital
budgeting
techniques to
be used in the
crude oil-
dependent
economies
Interview and
secondary
source
All the
techniques have
weaknesses and
hence more than
on technique
need to be
applied.
Study on the
best techniques
for the crude oil
companies.
Kristjanpoller, W.
D., & Concha, D.
2016 The impact
which the
fluctuation in
Questionnaires Stock price of
the airlines drops
as result of the
Effect of crude
oil price
fluctuation on

RESEARCH PROPOSAL 30
the crude oil
price have on
airline stock
crude oil price
volatility
the capital
budgeting on the
airline
companies.
Aldaarmi, A.,
Abbod, M., &
Salameh, H.).
2015 To find out the
fitness of
CAPM in
Saudi Arabia
stock
Interviews The CAPM is
the best model
for the crude oil-
dependent
economy.
The impact of
crude oil price
volatility on
capital
budgeting
techniques.
Research gaps identification and deliberation
The research on the effect which the crude oil price volatility on the crude oil stock
market and the public investments have been conducted previously. However, there are no
studies of the crude oil price volatility impact on the capital budgeting of the crude oil companies
in Saudi Arabia. The impact which the crude oil price volatility has on the crude oil stock market
and the public investments decision-making conducted elsewhere is totally different from the
impact which price volatility has on the crude oil companies in Saudi Arabia. The previous
research on the impact of crude oil price volatility on the public investment decision making was
not based on case studies and hence there is the possibility of ignoring the details which is
crucial in capital budgeting. By the reviewing of literature, it is very clear that there is a gap in
the body of knowledge because there are no studies which are addressing specifically the effect
on the capital budgeting in Saudi Arabia.

RESEARCH PROPOSAL 31
Conceptual Model Development
The capital budgeting is done using various conceptual models. These conceptual models
include the internal rate of returns, discounted cash flow, the net present value, the payback
period and the throughput analysis (Zhang et al., 2016). Most of these models have been
analyzed in the literature review but in this section, how the models were developed will be
discussed. The payback period is the simple model of capital budgeting and was developed by
the idea of finding the length of time it would take to cover the cost of the investment. This is
done by dividing the cost of the investment and the annual cash flow (Sari & Kahraman,2015).
The internal rate of return was developed to find out the return rate at which the net present value
will be zero. The net present value formula is used where the NPV is equated to zero (Saidu, &
Musa, 2017). The throughput analysis was developed through the consideration of the all the
project or investment which the company is undertaking as one entity and the revenue which the
investments are likely to generate subtracts the operating costs of all the investments. The net
present value was developed through the consideration of the revenue which the project is likely
to develop in the future based on the present value of the dollar (Sari & Kahraman,2015). The
discounted cash flow model was developed by applying a certain discount rate so as to get the
present value of the future cash flows so as to find out the amount which investor will accrue
from the investment.
Hypothesis Development
The hypothesis development requires the consideration of all the possibilities. This was
done through thinking wide and brainstorming so as to have a wide perspective of the matter in
the study. Through the reviewing of the literature, the gap in the body of knowledge was
identified and hence it was easy to develop the hypothesis to cover the gaps. Both the divergent
and the convergence thinking were used in the development of the hypothesis (Lee et al., 2017).

RESEARCH PROPOSAL 32
The divergent thinking was used to incorporate all the hypothesis which can be addressed in the
study and the convergent thinking was used to eliminate the redundant hypothesis. This process
resulted in the development of other hypotheses which will cover the research question in
totality.
Chapter's Summary
This chapter has reviewed the previous studies which were conducted by the researchers
in the past on the aspects of the capital budgeting and the crude oil price volatility. The many
things that stood clear were that the volatility of the crude oil price affects the company decision
in terms of capital allocation and the financing of the projects. The simple capital budgeting
model is not fit to handle the project which has high volatility in the price of the products and
service. The hypothesis of the study was deep through a deep review of the literature to analyze
all the possibilities such that the hypothesis can be addressing the areas where there is a gap in
the body of knowledge. The models used in the capital budget were developed based on different
aspect but all of them considers the total cost of the project and the total revenue which will be
generated from the investment.
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RESEARCH PROPOSAL 39
Methodology
Introduction
Case studies are “an exploration of a ‘bounded system’ of a case or multiple cases over
time through detail, in-depth data collection involving multiple sources of information rich in
context” (Creswell, 1998). The data sources utilized will be financial statements for the last five
years, the company’s public strategic vision documents publicly available, and an in-depth
interview with eight managers with roles in projects capital budgeting (Bell et al., 2018). The
methodology used in conducting the research is the most important thing in any research paper.
This is because if the methods of the collecting data are not good enough to address hypothesis
and for instance, the method of analysis are all good, then research will not be accurate. This is
emphasizing on the importance which every aspect of the research methodology has in the study
(Fellows et al., 2015). The primary data collection techniques are very important because they
involving mainly acquiring data from different people and hence good preparation has to be done
before the actual activities are conducted.
Background of The Research - Objectives, and Questions
Research objectives
The recent volatility of crude oil prices can have an effect on the capital budgeting
decision of petroleum companies.
• To determine the effect of crude oil price volatility on the budgets of Aramco Saudi.
• To determine the applied capital budgeting technique for Aramco Saudi.
• To investigate the applied budgetary policy, used by the managers for project assessment.

RESEARCH PROPOSAL 40
• To Assess the effectiveness of the applied capital budgeting methods on the Aramco’s efforts
to reach its 2020 Vision.
Research questions
• What is the possible effect of crude oil price volatility on the budgets of Aramco Saudi?
• What is the applied capital budgeting technique(s) for Aramco Saudi?
• How do managers evaluate projects, based on the applied budgetary policy in Aramco Saudi?
• How effective is the currently applied capital budgeting methods on the Aramco’s efforts to
reach its 2020 Vision?
Scope of the study
Basic Research Method Selected and Rationalization
In the study, both the qualitative and quantitative research method will be used. The
qualitative research method will be used to analyze the data on the capital budgeting of the
Armco Saudi and the quantitative research method will analyze the crude oil price volatility over
the past five years. This indicates that the study will involve both the primary source data and
secondary source data. The interview was chosen as the method to be used in the primary data
collection because the question has to be directed to only the managers who are conversant with
capital budgeting (Zhang et al., 2016). Another reason why the interviews are used is because the
amount of information which is required from those managers is detailed and hence can only be
effectively collected in the face to face interviews. The data collection process will be divided
into two processes. The first process will be collecting financial and strategic statements using
the public domain. The second source of data will be interviewed, the interviewees will be
identified through research through professional online networks data available via the public
domain (Hox et al., 2016). After identifying the selected interviewees, a formal request for an
interview will be made through the official company communication channels to set up the

RESEARCH PROPOSAL 41
interview date, and a copy of the questions will be sent to the interviewee before confirming the
interview date. The interview will last from forty-five minutes to one hour. An Audio recorder
will be used to record the answers of the interviewees, and hand-written notes will be taken
during the interview. The interviewee will be identified based on last name basis, and the current
role at the company.
When it comes to the secondary source of data, the main question which arises is the
issue of the data validity and reliability (Lindlof & Taylor, 2017). The validity of the data is
determined by who collected the data and when was the data collected. The data used in this
study covers the last five years of the Armco Saudi. It can seem that the data which is covering
just 5 years is data which is not enough to conduct a good study. However, this is not always the
case because in some cases the investigation which is been conducted is involving the reality
which started to be felt just 5 years ago. The reason why 5 years have been selected is that the
volatility of the crude oil price has been felt with the greatest impact for the last 5 years after
almost all the countries in the world recovered from the great recession of 2008 and hence the
data is valid. The crude oil price volatility which has been experienced before 2014 had a reason
for and the fluctuation in the prices was not too large to be considered good. The reliability of
the data depends on the methods which are used to collect data. The data is about the capital
budgeting of the Armco Saudi in relation to crude oil price volatility and which the company
updates on a daily basis on their website (Sekaran& Bougie, 2016). The data has to be true
because the shareholder of Armco Saudi has to be provided with the real-time data of what is
happening in the company.
Population, Sample, and Respondents
The case study selected for this study is the Armco Saudi and hence the population of the
required in this study is the managers of the Armco. Nevertheless, not all the managers are

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conversant with the ideas of capital budgeting and hence a sample of the population has to be
selected. The sample will be selected based on the knowledge of the capital budgeting and in
ensuring that at least one manager in the major departments is interviewed. Only 8 managers will
b involved in the interview because the questionnaire is lengthy and it will take much time to
interview managers. The number of the respondents is expected to 100% because the managers
will be informed prior to the day of the interview which means that their probability of managers
refusing to be interviewed is almost zero not unless some more important thing arises on that
day. The maximum variation sampling strategy (Creswell, 1998) will be utilized to allow for an
in-depth insight into the capital budgeting techniques. The background for the interviewees will
include 4 managerial roles: engineering, accounting, finance, and corporate strategy. From each
department one senior level, one middle-level manager will be included for the interview.
Research instruments - Questionnaires Design and Development
The questionnaire which will be used in the interview will be designed to cover all the
hypothesis of the study. The first four questions will be based on the basic information of the
managers like the position they hold in the company and the scope of their work (Zhang et al.,
2016). The second section of the questionnaire will have three questions which will address the
issue of how the crude oil price volatility has been since the manager started working in the
company and how has it impacted the budget of the company. The third section will two
questions which will address the capital budgeting techniques which the Armco Saudi has been
applying for the last five years in case the manager was still in the company during that time or
ready from the company history. The managers will be required to comment on the serious
implication which the crude oil price volatility has had on the capital budgeting techniques. The
fourth section of the questionnaire will have four questions on the budgetary policies which the
company have and whether they are updated as a result of crude oil price volatility. The last

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section will have two questions on the effectiveness of the applied capital budgeting techniques
to achieve the vision of the Armco Saudi for 2020.
Unit of Measurement and the Measurement of Variables
The study has the independent variable as the crude oil price volatility which will be
measured in both dollars and percentage. The change in the price of crude oil will be presented in
US Dollars and in other cases, the percentage change will be calculated by dividing the change in
the price with the immediate previous price (Salazar et al., 2015). The capital budget technique
which is the dependent variable will be is part of the qualitative data which will be analyzed
through coding using the Atlas.ti version 7.0.
Pilot Study and The Reliability and Validity Test - Multiple Regression Test
For the case of the secondary data accessing, the pilot study will not need to be conducted
because they are obtained from the Armco Saudi company website. However, for the interviews
pilot study will need to be conducted so as to ascertain that the question in the questionnaire are
effective to obtain the information required from the Armco managers such that the research
hypothesis can be covered (Zhang et al., 2016). The pilot study will be conducted by conducting
an interview in another crude oil supplying company with at least two managers. When it is
discovered that the managers are having trouble in answering some question then those question
will be reframed in ways which they will be clear (Tayloret al., 2016). The pilot study will be
conducted in two companies other than Armco Saudi so as to ascertain that the language used in
the questionnaire is straightforward and professional. Based on the answers which the managers
for the companies where the pilot study gives, a pilot validity and reliability test will be
conducted through multiple regression test. The price of the crude oils in those countries will be
accessed from their websites form the last 5 years and they get analyzed in relation to the capital
budgeting techniques of the company. This will give the hint if the research and the analysis

RESEARCH PROPOSAL 44
method are accurate or not. When all the hypothesis fails the validity and reliability tests, then
they will be reframed as well.
Method of Data Analysis
For financial & strategic documents data, cross-examining the data will available crude
oil prices available through global exchanges, will provide an insight of the effect of crude oil
price changes on the strategic insight documents, will be used to determine the degree by which
crude oil prices have affected the strategic direction of the company.
There has been a shift in corporate finance and valuation in recent years, it has been towards
giving “excess returns” a more central role in determining the value of a business (Zhang et al.,
2016). While early valuation models emphasized the relationship between growth and value –
higher growth firms were assigned higher values – more recent iterations of these models have
noted that growth unaccompanied by excess returns creates no value. With this shift towards
excess returns has come to an increased focus on measuring and forecasting returns earned by
businesses on both investments made in the past and expected future investments (Damodaran,
2007). Therefore the two ratios of Return on capital, and Return on Equity will be analyzed
through the financial statements. This will be an added determinant of how successful is the
current budgeting techniques in monetary terms.
For interview data, Microsoft Word files will be created. All files will be saved in the
researcher’s portable computer for which he only has access to guarantee the data will be
uncompromised by any third party. The meaning of analysis context will be used as the unit of
analysis for coding. This means that the data is not coded sentence by sentence or paragraph by
paragraph, but coded for meaning. The qualitative software Atlas.ti version 7.0 for data
management and analysis, will be used (Thomas et al., 2018).

RESEARCH PROPOSAL 45
Thematic analysis will be adopted to develop meaningful insight from the available
interview data Braun and Clarke (2006) guidelines, will be implemented for analysis. These
guidelines that will be followed are;”(1) familiarizing yourself with your data, (2) generating
initial codes, (3) The researcher read throughout each transcript to immerse in the data, (4)
reviewing themes, (5) defining and naming themes, and (6) producing the report.”
Summary of the Chapter
In this chapter, the research methods which will be used in the study have been analyzed.
The data of the unit price of the crude oil will be collected from the website of Armco Saudi. The
primary data will be collected from the managers through interviews so as to get the details
which are required in this study. the aspect of the validity and the reliability of the secondary
data have been addressed. The validity of the data is unquestionable considering that Armco
Saudi itself collect the data and it is reliable by the fact that the method used to collect it are
reliable and it gets updated on a daily basis. The pilot study will be conducted on some other
crude oil companies on similar parameters find out the appropriateness of the questionnaire and
the hypothesis. The validity and reliability test of the pilot study will be conducted using the
multiple regression analysis. The crude oil price volatility is the independent variable while the
capital budgeting techniques are the dependent variables. The unit of measurements of the crude
oil price volatility will be dollars. In this section, the methods which will be used to conduct this
research have been discussed.
Research Timetable
The expected timetable for the research will be as follows: one year will be allocated for the
write-up process of literature review, establishing a theoretical framework, and detailing the
appropriate research methodology and analysis techniques that will be applied. the interviewing
process in the Kingdom of Saudi Arabia, financial data collection from the public domain, and

RESEARCH PROPOSAL 46
the analysis of the two sources of data obtained, and write-up of conclusions will be
accomplished within one year – one and half years.
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