Please show work for part 1 in excel.
QUESTIONS
How attractive was this investment? With the recent coal prices dropped to a level lower than those during the global financial crisis, do you think it is a good time to pursue expansion of coal mining? Would Agus Halim be able to get the green light from the patent firm to pursue it? Would the Bankers grant the 12 million term loan for this acquisition?
DIRECTIONS
Please answer the questions on page 3 of the case. The first question is asking for the NPV of the project. Exhibit 9 has the data for calculating NPV. The discount rate to be used for NPV is the WACC. Also, discount rate should be applied to Free-Cash Flow (FCF). When the financial statements are prepared according to GAAP, FCF can be calculated by adding back depreciation to net income (also called after-tax operating profit), adding (subtracting) any decrease (increase) in working capital requirements, and subtracting capital investments. However, these operations are a bit complicated by the non-conventional usage of sign in Exhibit 9. When a standard income statement is prepared, depreciation is written as a positive number. So, the number can be easily added to net income. But for Exhibit 9, depreciation is written as a negative number; so, it has to be subtracted to find FCF. Similarly, increase in working capital would be a positive number in a standard cash-flow statement. But it is negative in Exhibit 9. This means the increase in working capital in Exhibit 9 should be added to find FCF. So, for Exhibit 9, FCF = after-tax operating profit - depreciation + working capital + capital expenditure (in the first two years. They are already negative numbers.).
The other questions on page 3 are quite subjective. One could argue either way for each of those questions. As long as the arguments are reasonable and explained well, you will get points for those.
Also, please answer the following-
i) What are the key variables that could be used for Sensitivity/Scenario Analysis? These are the most important variables that are used in calculating NPV of the project and have a large impact when they are changed even by a small amount. Use one of these variables to show how the answer to the first question on page 3 of Diamond Energy case would change.
ii) List some of the key risk factors involved in making this acquisition. Briefly describe why each is a risk factor.
iii) What are some of the benefits of this acquisition?