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. Use Sensitivity Analysis for Project and Parent Viewpoints (pp. 498-499) * Assignment Requirements , Assume 10% Depreciated (Rp/S) Rupiah-to-Dollar exchange rate as compared to those shown in the case study Assume Sales volume to be 10% lower as compared to those shown in the case study All other conditions remain the same as in text Compute NPV and IRR under the above conditions w.r.t. Project and Parent viewpoints id 23 7% Irom a bank consortium arranged by e EXHIBIT 18.2 Investment and Financing of the Semen Indonesia Project (in Indonesia Project (in 000s) Investment Average exchange rate, Rp/$ Cost of installed capacity ($/tonne) Installed capacity Investment in US$ Investment in rupiah Percentage of investment in plant and equipment Plant and equipment (000s Rp) Depreciation of capital equipment (years) Annual depreciation (millions) Costs of Capital: Cemex (Mexico) Risk-free rate Credit premium Cost of debt Corporate income tax rate Cost of debt after-tax Percent debt Cost of Capital: Semen Indonesia (Indonesia) Risk-free rate Credit premium Cost of rupiah debt Indonesia corporate income tax rate Cost of US$ debt, after-tax Cost of USS debt (rupiah equivalent) Cost of US$ debt, after-tax (rupiah eq) Percent debt The cost of the US$ loan is stated in rupiah terms assuming purchasing power parity and U per annum, respectively, throughout the subject period Financing 11,000,000,000 11,000,000,000 2,750,000,000 8,250,000,000 22,000,000,000 10,000 Equity $11 Debt: Rupiah debt USS debt in rupiah 20,000 $2,200,000 22,000,000,000 Total 80% 17,600,000,000 Note: USS debt principal $825,000 (1,760,000) 6.000% 2.000% 8.000% 35.000% Cemex beta Equity risk premium Cost of equity Percent equity 7.000% 16.500% 5.200% WACC 11 .980% 33.000% 2.000% 35.000% 30.000% 5.200% 38.835% 271 84% Semen Indonesia beta Equity risk premium Cost of equity Percent equity WACC 6.000% 40.000% 33.257% S. dollar and Indonesian inflation rates of 3% and 30% Cost 35,000% 38.835% After-tax Cost 24.500% 27.1 84% Component Cost 3.063% 10.1 94% Financing Proportion Amount 2,750,000,000 8,250,000,000 11,000,000,000 11,000,000,000 22,000,000,000 Semen Indonesia (Rp) Rupiah loan Cemex loan Total debt 40.000% 40.000% WACC 20.000% 33.257% Total financing EXHIBIT 18.3 Semen Indonesia's Debt Service Schedules and Foreign Exchange Gains/Losses Spot rate (Rp/$) Project Year 32,028 5 15,930 25,376 4 10,000 12,621 20,106 Indonesian loan @ 35% for 8 years (millions of rupiah) Loan principal Interest payment Principal payment Total payment 2,750,000 (962,500) (928,921)(883,590) (822,393) (739,777) (95,939) (129,518) (174,849) (236,046) (318,662) (1,058,439) (1,058,439) (1,058,439) (1,058,439) (1,058,439) Cemex loan @ 10% for 5 years (millions of U.S.dollars) Loan principal Interest payment Principal payment Total payment Cemex loan converted to Rp at scheduled and current spot rates (millions of Rp): Scheduled at Rp10,000/S: Interest payment Principal payment Total payment Actual (at current spot rate): Interest payment Principal payment Total payment Cash flows in Rp on Cemex loan (millions of Rp): Total actual cash flows IRR of cash flows Foreign exchange gains (losses) on Cemex loan (millions of Rp) Foreign exchange gains (losses) on interest Foreign exchange gains (losses) on principal Total foreign exchange losses on debt 825 ($82.50) ($135.13) ($217.63) ($68.99) ($148.65) ($217.63) ($54.12) ($163.51) ($217.63) ($179.86) ($217.63) ($19.78) $197.85) ($217.63) (197,848) (1,351,329) (1,486,462) (1,635,108) (1,798,619) (1,978,481) (2,176,329) (2,176,329) (2,176,329) (2,176,329) (2,176,329) (825,000) (689,867) (541,221) (377,710) (1,041,262) (1,098,949) (1,088,160) (958,480) (633,669) (1,705,561) (2,367,915) (3,287,494) (4,564,190) (6,336,691) (2,746,823) (3,466,864) (4,375,654) (5,522,670) (6,970,360) 8,250,000 (2,746,823) (3,466,864) (4,375,654) (5,522,670) (6,970,360) 38.835% (216,262) (409,082) (546,940) (580,770) (354,232) (881,453) (1,652,385) (2,765,571) (4,358,210) (570,494) (1,290,535) (2,199,325) (3,346,341) (4,794,031) (435,821) loan by Cemex to the Indonesian subsidiary is denominated in U.S. dollars. Therefore, the loan will have to be repaid in U.S. dolla rs, not rupiah. At The loan of the loan agreement, the spot exchange rate is Rp10,000/$. This is the assumption used in calculating the "scheduled repaying of principal rest in rupiah. The rupiah, however, ire to a foreign exchange loss as it takes more and more rupiah to acquire U.S. dollars for debt service, both pri is expected to depreciate in line with purchasing power parity. As it is repaid, the "actual" exchange rate will theri xchange losses on this debt service will be recognized on the Indonesian income statement foreign e EXHIBIT 18.4 Semen Indonesia's Pro Forma Income Statement (millions of rupiah) 32,028 20,106 3 12.00 58.00 1,166,128 25,376 4 12.00 58.00 1,471,813 Exchange rate (Rp/US$) Project Year Sales volume Sales price (US$) Sales price (Rp) Total revenue Less cash costs Less other production costs Less loading costs Less shipping costs Total production costs Gross profit 12,621 15,930 12.00 58.00 1,857,627 5,856,311 9,239,325 13,993,541 17,661,751 22,291,530 (920,000) (1,495,000) (2,332,200) (3,031,860) (3,941,418) (160,000) (260,000) (405,600) (527,280) (685,464) (201,942) (328,155) (511,922) (665,499) (865,149) (1,009,709) (1,640,777) (2,559,612) (3,327,495) (4,325,744) (2,291,650) (3,723,932) (5,809,334) (7,552,134) (9,817,774) 3,564,660 5,515,393 8,184,207 10,109,617 12,473,756 10.00 58.00 923,933 732,039 56.0% (117,126) (184,787) (279,871) (353,235) (445,831) (468,505) ( (1,942,793) (2,674,984) 2,979,029 4,499,067 6,504,982 7,813,589 9,352,941 60.9% 59.7% 58.5% 57.2% Gross margin Less license fees Less general and administrative EBITDA Less depreciation and amortization EBIT Less interest on Cemex debt Foreign exchange losses on debt Less interest on local debt EBT Less income taxes (30%) Net income (831,539) (1,399,354) (1,760,000) (1,760,000) (1,760,000) (1,760,000) (1,760,000) 1,219,029 29 2,739,067 4,744,982 6,053,589 7,592,941 (825,000) (689,867) (541,221) (377,710) (197,848) (570,494) (1,290,535) (2,199,325) (3,346,341) (4,794,031) (962,500) (928,921) (883,590) (822,393) (739,777) (1,138,965) (170,256) 1,120,846 1,507,145 1,861,285 (395,631) (558,386) (1,138,965) (170,256) 1,120,846 1,111,514 1,302,900 Net income (millions of US$) Return on sales Dividends distributed Retained EBITDA 5.8 651,450 651,450 560,423 560,423 555,757 555,757 (1,138,965) (170,256 earnings before interest, taxes, depreciation, and amortization. EBIT earnings before interest and taxes; EBT earnings before taxes Tax oper All calculation credits resulting from current period losses are carried forward toward next year's tax liabilities. Dividends are not distributed in the first year of rations as a result of losses, and are distributed at a 50% rate in years 2-5 s are exact but may appear not to add due to reported decimal places. The tax payment for year 3 ls zero, and year 4 s less than 30%, esult of tax loss carry-forwards from previous years as a r Project Viewpoint Capital Budget The capital budget for the Semen Indo Exhibit 18.5. We find the net cash flow, free cash flow as it is often labe (1) EBITDA (earnings before interest, taxes, depreciation, and amortizatio taxes, (3) changes in net working capital (the sum of the ries, and payables nesia project from a project viewpoint is shown in led, by summing n), (2) recalculated net additions to receivables, invento- necessary to support sales growth), and (4) capital investment Note that EBIT, not EBT, is used in the capital budget, which contains both depreciation and interest expense. Depreciation and amortization are noncash expenses of the fi therefore contribute positive cash flow. Because the capital budget creates cash flows that will be discounted to present value with a discount rate, and the discount rate includes the cost of debt-interest-we do not wish to subtract interest twice. Therefore, taxes are recalculated on the basis of EBIT.3 The firm's cost of capital used in discounting also includes the deductibility of debt interest in its calculation rm and The initial investment of Rp22 trillion is the total capital invested to support these earn ings. Although receivables average 50 to 55 days sales outstanding (DSO) and inventorie average 65 to 70 DSO, payables and trade credit are also relatively long at 114 DSO in the Indonesian cement industry. Semen Indonesia expects to add approximately 15 net DSO to its investment with sales growth. The remaining elements to complete the project viewpoint's capital budget are the terminal value (discussed below) and the discount rate of 33.257% (the firm's weighted average cost of capital) The terminal value (TV) of the project represents the continuing value of the ceme manufacturing facility in the years after year 5, the last year of the detailed pro forma financial analysis shown in Exhibit 18.5. This value, like all asset values according to financial theo the present value of all future free cash flows that the asset is expected to yield. We calcula the TV as the present value of a perpetual net operating cash flow (NOCF) generated in th ry, i Semen Indonesia Capital Budget: Project Viewpoint (millions of rupiah 621 15 930 EXHIBIT 18.5 Semen Indonesia Captal Budget: ProjectViewpoint (millions of rupiah) EXHIBIT 18.5 20,106 3 25,376 4 32,028 5 12,621 Exchange rate (Rp/USS) Project Year EBIT Less recalculated taxes @ 30% Add back depreciation Net operating cash flow Less changes to NWC Initial investment Terminal value Free cash flow (FCF) NPV @ 33.257% IRR 10,000 15,930 2 1,219,029 2,739,067 4,744,982 6,053,589 7,592,941 (365,709) (821,720) (1,423,495) (1,816,077) (2.277,882) 1,760,000 2,613,320 3,677,347 5,081,487 5,997,512 7,075,059 (240,670) 139,028) (195,379) (150,748) (190,265) 21,274,102 5,846,764 28,158,896 1,760,000 1,760,000 1,760,000 1,760,000 (22,000,000) (22,000,000) 2,372,650 3,538,319 4,886,109 (7,606,313) 19.1% internal rate of return, the rate C net working capital. NPV net present value. Discount rate is Semen Indonesia's WACC of 33257%. IRR of discount yielding an NPV of exactly zero. Values in exhibit are exact and are rounded to the nearest million. 3This highlights the distinction between an income statement and a capital budget. The project's income statement shows losses the first two years of operations as a result of interest expenses and forecast foreign exchange losses, so It is n not expected to pay taxes. But the capital budget, constructed on the basis of EBIT, before these financing and foreign exchange expenses, calculates a positive tax payment. CHAPTER 18 Multinational Capital Budgeting and Cross-Border Acquisitions 499 fifth year by Semen Indonesia, the growth rate assumed for that net operating cash flow (g), and the firm's weighted average cost of capital (KwACC): Terminal value= NkwFc1 + g) = 7075257(1+0) = Rp21 274.102 NOC (1 + g) WACC 8 7,075,059(1 + 0) = 33257 - or Rp21 ,274,102 trillion. The assumption that g 0, that is, that net operating cash flows will not grow past year 5 is probably not true, but it is a prudent assumption for Cemex to make when estimating future cash flows. (If Semen Indonesia's business was to continue to grow in- line with the Indonesian economy, g may well be 1% or 2%.) The results of the capital budget from the project viewpoint indicate a negative net present value (NPV) and an internal rate of return (IRR) of only 19.1% compared to the 33.257% cost of capital. These are the returns the project would yield to a local or Indonesian investor in Indonesian rupiah. The project, from this viewpoint, is not acceptable. Project Viewpoint Capital Budget The capital budget for the Semen Indo Exhibit 18.5. We find the net cash flow, free cash flow as it is often labe (1) EBITDA (earnings before interest, taxes, depreciation, and amortizatio taxes, (3) changes in net working capital (the sum of the ries, and payables nesia project from a project viewpoint is shown in led, by summing n), (2) recalculated net additions to receivables, invento- necessary to support sales growth), and (4) capital investment Note that EBIT, not EBT, is used in the capital budget, which contains both depreciation and interest expense. Depreciation and amortization are noncash expenses of the fi therefore contribute positive cash flow. Because the capital budget creates cash flows that will be discounted to present value with a discount rate, and the discount rate includes the cost of debt-interest-we do not wish to subtract interest twice. Therefore, taxes are recalculated on the basis of EBIT.3 The firm's cost of capital used in discounting also includes the deductibility of debt interest in its calculation rm and The initial investment of Rp22 trillion is the total capital invested to support these earn ings. Although receivables average 50 to 55 days sales outstanding (DSO) and inventorie average 65 to 70 DSO, payables and trade credit are also relatively long at 114 DSO in the Indonesian cement industry. Semen Indonesia expects to add approximately 15 net DSO to its investment with sales growth. The remaining elements to complete the project viewpoint's capital budget are the terminal value (discussed below) and the discount rate of 33.257% (the firm's weighted average cost of capital) The terminal value (TV) of the project represents the continuing value of the ceme manufacturing facility in the years after year 5, the last year of the detailed pro forma financial analysis shown in Exhibit 18.5. This value, like all asset values according to financial theo the present value of all future free cash flows that the asset is expected to yield. We calcula the TV as the present value of a perpetual net operating cash flow (NOCF) generated in th ry, i Semen Indonesia Capital Budget: Project Viewpoint (millions of rupiah 621 15 930 . Use Sensitivity Analysis for Project and Parent Viewpoints (pp. 498-499) * Assignment Requirements , Assume 10% Depreciated (Rp/S) Rupiah-to-Dollar exchange rate as compared to those shown in the case study Assume Sales volume to be 10% lower as compared to those shown in the case study All other conditions remain the same as in text Compute NPV and IRR under the above conditions w.r.t. Project and Parent viewpoints id 23 7% Irom a bank consortium arranged by e EXHIBIT 18.2 Investment and Financing of the Semen Indonesia Project (in Indonesia Project (in 000s) Investment Average exchange rate, Rp/$ Cost of installed capacity ($/tonne) Installed capacity Investment in US$ Investment in rupiah Percentage of investment in plant and equipment Plant and equipment (000s Rp) Depreciation of capital equipment (years) Annual depreciation (millions) Costs of Capital: Cemex (Mexico) Risk-free rate Credit premium Cost of debt Corporate income tax rate Cost of debt after-tax Percent debt Cost of Capital: Semen Indonesia (Indonesia) Risk-free rate Credit premium Cost of rupiah debt Indonesia corporate income tax rate Cost of US$ debt, after-tax Cost of USS debt (rupiah equivalent) Cost of US$ debt, after-tax (rupiah eq) Percent debt The cost of the US$ loan is stated in rupiah terms assuming purchasing power parity and U per annum, respectively, throughout the subject period Financing 11,000,000,000 11,000,000,000 2,750,000,000 8,250,000,000 22,000,000,000 10,000 Equity $11 Debt: Rupiah debt USS debt in rupiah 20,000 $2,200,000 22,000,000,000 Total 80% 17,600,000,000 Note: USS debt principal $825,000 (1,760,000) 6.000% 2.000% 8.000% 35.000% Cemex beta Equity risk premium Cost of equity Percent equity 7.000% 16.500% 5.200% WACC 11 .980% 33.000% 2.000% 35.000% 30.000% 5.200% 38.835% 271 84% Semen Indonesia beta Equity risk premium Cost of equity Percent equity WACC 6.000% 40.000% 33.257% S. dollar and Indonesian inflation rates of 3% and 30% Cost 35,000% 38.835% After-tax Cost 24.500% 27.1 84% Component Cost 3.063% 10.1 94% Financing Proportion Amount 2,750,000,000 8,250,000,000 11,000,000,000 11,000,000,000 22,000,000,000 Semen Indonesia (Rp) Rupiah loan Cemex loan Total debt 40.000% 40.000% WACC 20.000% 33.257% Total financing EXHIBIT 18.3 Semen Indonesia's Debt Service Schedules and Foreign Exchange Gains/Losses Spot rate (Rp/$) Project Year 32,028 5 15,930 25,376 4 10,000 12,621 20,106 Indonesian loan @ 35% for 8 years (millions of rupiah) Loan principal Interest payment Principal payment Total payment 2,750,000 (962,500) (928,921)(883,590) (822,393) (739,777) (95,939) (129,518) (174,849) (236,046) (318,662) (1,058,439) (1,058,439) (1,058,439) (1,058,439) (1,058,439) Cemex loan @ 10% for 5 years (millions of U.S.dollars) Loan principal Interest payment Principal payment Total payment Cemex loan converted to Rp at scheduled and current spot rates (millions of Rp): Scheduled at Rp10,000/S: Interest payment Principal payment Total payment Actual (at current spot rate): Interest payment Principal payment Total payment Cash flows in Rp on Cemex loan (millions of Rp): Total actual cash flows IRR of cash flows Foreign exchange gains (losses) on Cemex loan (millions of Rp) Foreign exchange gains (losses) on interest Foreign exchange gains (losses) on principal Total foreign exchange losses on debt 825 ($82.50) ($135.13) ($217.63) ($68.99) ($148.65) ($217.63) ($54.12) ($163.51) ($217.63) ($179.86) ($217.63) ($19.78) $197.85) ($217.63) (197,848) (1,351,329) (1,486,462) (1,635,108) (1,798,619) (1,978,481) (2,176,329) (2,176,329) (2,176,329) (2,176,329) (2,176,329) (825,000) (689,867) (541,221) (377,710) (1,041,262) (1,098,949) (1,088,160) (958,480) (633,669) (1,705,561) (2,367,915) (3,287,494) (4,564,190) (6,336,691) (2,746,823) (3,466,864) (4,375,654) (5,522,670) (6,970,360) 8,250,000 (2,746,823) (3,466,864) (4,375,654) (5,522,670) (6,970,360) 38.835% (216,262) (409,082) (546,940) (580,770) (354,232) (881,453) (1,652,385) (2,765,571) (4,358,210) (570,494) (1,290,535) (2,199,325) (3,346,341) (4,794,031) (435,821) loan by Cemex to the Indonesian subsidiary is denominated in U.S. dollars. Therefore, the loan will have to be repaid in U.S. dolla rs, not rupiah. At The loan of the loan agreement, the spot exchange rate is Rp10,000/$. This is the assumption used in calculating the "scheduled repaying of principal rest in rupiah. The rupiah, however, ire to a foreign exchange loss as it takes more and more rupiah to acquire U.S. dollars for debt service, both pri is expected to depreciate in line with purchasing power parity. As it is repaid, the "actual" exchange rate will theri xchange losses on this debt service will be recognized on the Indonesian income statement foreign e EXHIBIT 18.4 Semen Indonesia's Pro Forma Income Statement (millions of rupiah) 32,028 20,106 3 12.00 58.00 1,166,128 25,376 4 12.00 58.00 1,471,813 Exchange rate (Rp/US$) Project Year Sales volume Sales price (US$) Sales price (Rp) Total revenue Less cash costs Less other production costs Less loading costs Less shipping costs Total production costs Gross profit 12,621 15,930 12.00 58.00 1,857,627 5,856,311 9,239,325 13,993,541 17,661,751 22,291,530 (920,000) (1,495,000) (2,332,200) (3,031,860) (3,941,418) (160,000) (260,000) (405,600) (527,280) (685,464) (201,942) (328,155) (511,922) (665,499) (865,149) (1,009,709) (1,640,777) (2,559,612) (3,327,495) (4,325,744) (2,291,650) (3,723,932) (5,809,334) (7,552,134) (9,817,774) 3,564,660 5,515,393 8,184,207 10,109,617 12,473,756 10.00 58.00 923,933 732,039 56.0% (117,126) (184,787) (279,871) (353,235) (445,831) (468,505) ( (1,942,793) (2,674,984) 2,979,029 4,499,067 6,504,982 7,813,589 9,352,941 60.9% 59.7% 58.5% 57.2% Gross margin Less license fees Less general and administrative EBITDA Less depreciation and amortization EBIT Less interest on Cemex debt Foreign exchange losses on debt Less interest on local debt EBT Less income taxes (30%) Net income (831,539) (1,399,354) (1,760,000) (1,760,000) (1,760,000) (1,760,000) (1,760,000) 1,219,029 29 2,739,067 4,744,982 6,053,589 7,592,941 (825,000) (689,867) (541,221) (377,710) (197,848) (570,494) (1,290,535) (2,199,325) (3,346,341) (4,794,031) (962,500) (928,921) (883,590) (822,393) (739,777) (1,138,965) (170,256) 1,120,846 1,507,145 1,861,285 (395,631) (558,386) (1,138,965) (170,256) 1,120,846 1,111,514 1,302,900 Net income (millions of US$) Return on sales Dividends distributed Retained EBITDA 5.8 651,450 651,450 560,423 560,423 555,757 555,757 (1,138,965) (170,256 earnings before interest, taxes, depreciation, and amortization. EBIT earnings before interest and taxes; EBT earnings before taxes Tax oper All calculation credits resulting from current period losses are carried forward toward next year's tax liabilities. Dividends are not distributed in the first year of rations as a result of losses, and are distributed at a 50% rate in years 2-5 s are exact but may appear not to add due to reported decimal places. The tax payment for year 3 ls zero, and year 4 s less than 30%, esult of tax loss carry-forwards from previous years as a r Project Viewpoint Capital Budget The capital budget for the Semen Indo Exhibit 18.5. We find the net cash flow, free cash flow as it is often labe (1) EBITDA (earnings before interest, taxes, depreciation, and amortizatio taxes, (3) changes in net working capital (the sum of the ries, and payables nesia project from a project viewpoint is shown in led, by summing n), (2) recalculated net additions to receivables, invento- necessary to support sales growth), and (4) capital investment Note that EBIT, not EBT, is used in the capital budget, which contains both depreciation and interest expense. Depreciation and amortization are noncash expenses of the fi therefore contribute positive cash flow. Because the capital budget creates cash flows that will be discounted to present value with a discount rate, and the discount rate includes the cost of debt-interest-we do not wish to subtract interest twice. Therefore, taxes are recalculated on the basis of EBIT.3 The firm's cost of capital used in discounting also includes the deductibility of debt interest in its calculation rm and The initial investment of Rp22 trillion is the total capital invested to support these earn ings. Although receivables average 50 to 55 days sales outstanding (DSO) and inventorie average 65 to 70 DSO, payables and trade credit are also relatively long at 114 DSO in the Indonesian cement industry. Semen Indonesia expects to add approximately 15 net DSO to its investment with sales growth. The remaining elements to complete the project viewpoint's capital budget are the terminal value (discussed below) and the discount rate of 33.257% (the firm's weighted average cost of capital) The terminal value (TV) of the project represents the continuing value of the ceme manufacturing facility in the years after year 5, the last year of the detailed pro forma financial analysis shown in Exhibit 18.5. This value, like all asset values according to financial theo the present value of all future free cash flows that the asset is expected to yield. We calcula the TV as the present value of a perpetual net operating cash flow (NOCF) generated in th ry, i Semen Indonesia Capital Budget: Project Viewpoint (millions of rupiah 621 15 930 EXHIBIT 18.5 Semen Indonesia Captal Budget: ProjectViewpoint (millions of rupiah) EXHIBIT 18.5 20,106 3 25,376 4 32,028 5 12,621 Exchange rate (Rp/USS) Project Year EBIT Less recalculated taxes @ 30% Add back depreciation Net operating cash flow Less changes to NWC Initial investment Terminal value Free cash flow (FCF) NPV @ 33.257% IRR 10,000 15,930 2 1,219,029 2,739,067 4,744,982 6,053,589 7,592,941 (365,709) (821,720) (1,423,495) (1,816,077) (2.277,882) 1,760,000 2,613,320 3,677,347 5,081,487 5,997,512 7,075,059 (240,670) 139,028) (195,379) (150,748) (190,265) 21,274,102 5,846,764 28,158,896 1,760,000 1,760,000 1,760,000 1,760,000 (22,000,000) (22,000,000) 2,372,650 3,538,319 4,886,109 (7,606,313) 19.1% internal rate of return, the rate C net working capital. NPV net present value. Discount rate is Semen Indonesia's WACC of 33257%. IRR of discount yielding an NPV of exactly zero. Values in exhibit are exact and are rounded to the nearest million. 3This highlights the distinction between an income statement and a capital budget. The project's income statement shows losses the first two years of operations as a result of interest expenses and forecast foreign exchange losses, so It is n not expected to pay taxes. But the capital budget, constructed on the basis of EBIT, before these financing and foreign exchange expenses, calculates a positive tax payment. CHAPTER 18 Multinational Capital Budgeting and Cross-Border Acquisitions 499 fifth year by Semen Indonesia, the growth rate assumed for that net operating cash flow (g), and the firm's weighted average cost of capital (KwACC): Terminal value= NkwFc1 + g) = 7075257(1+0) = Rp21 274.102 NOC (1 + g) WACC 8 7,075,059(1 + 0) = 33257 - or Rp21 ,274,102 trillion. The assumption that g 0, that is, that net operating cash flows will not grow past year 5 is probably not true, but it is a prudent assumption for Cemex to make when estimating future cash flows. (If Semen Indonesia's business was to continue to grow in- line with the Indonesian economy, g may well be 1% or 2%.) The results of the capital budget from the project viewpoint indicate a negative net present value (NPV) and an internal rate of return (IRR) of only 19.1% compared to the 33.257% cost of capital. These are the returns the project would yield to a local or Indonesian investor in Indonesian rupiah. The project, from this viewpoint, is not acceptable. Project Viewpoint Capital Budget The capital budget for the Semen Indo Exhibit 18.5. We find the net cash flow, free cash flow as it is often labe (1) EBITDA (earnings before interest, taxes, depreciation, and amortizatio taxes, (3) changes in net working capital (the sum of the ries, and payables nesia project from a project viewpoint is shown in led, by summing n), (2) recalculated net additions to receivables, invento- necessary to support sales growth), and (4) capital investment Note that EBIT, not EBT, is used in the capital budget, which contains both depreciation and interest expense. Depreciation and amortization are noncash expenses of the fi therefore contribute positive cash flow. Because the capital budget creates cash flows that will be discounted to present value with a discount rate, and the discount rate includes the cost of debt-interest-we do not wish to subtract interest twice. Therefore, taxes are recalculated on the basis of EBIT.3 The firm's cost of capital used in discounting also includes the deductibility of debt interest in its calculation rm and The initial investment of Rp22 trillion is the total capital invested to support these earn ings. Although receivables average 50 to 55 days sales outstanding (DSO) and inventorie average 65 to 70 DSO, payables and trade credit are also relatively long at 114 DSO in the Indonesian cement industry. Semen Indonesia expects to add approximately 15 net DSO to its investment with sales growth. The remaining elements to complete the project viewpoint's capital budget are the terminal value (discussed below) and the discount rate of 33.257% (the firm's weighted average cost of capital) The terminal value (TV) of the project represents the continuing value of the ceme manufacturing facility in the years after year 5, the last year of the detailed pro forma financial analysis shown in Exhibit 18.5. This value, like all asset values according to financial theo the present value of all future free cash flows that the asset is expected to yield. We calcula the TV as the present value of a perpetual net operating cash flow (NOCF) generated in th ry, i Semen Indonesia Capital Budget: Project Viewpoint (millions of rupiah 621 15 930

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