Multinational

Finance
Cemex Enter Indonesia
Group 4 :
Fransisca Arini
Muhammad Prasetio
Tony Ferdyantara
(Kelas Eksekutif B 30 A - C)
Lecturer : Erni Ekawati Phd

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Cemex Enter Indonesia

Overview
Cementos Mexicanos (CEMEX) planning to construct a cement
manufacturing facility on the Indonesian island of Sumatera in
1998. The project named Semen Indonesia (SI)

3 reasons :
1. Entering new market in Southeast Asia.
2. Good long term prospect of Asian infrastructure
development and growth.
3. Indonesia has positive prospective to act as a producefor-export due to the depreciation of Rupiah in 1997

Cemex competing in global market place for both market

place and capital. Thus the Cemex functional currency is US$,
while the SI project will be evaluated for both cash flows and
capital cost in US$.

Key Issues
1.
Capital Budgeting Analysis
- Construct pro forma financial statements of SI in Rp
- Create 2 capital budgets (the project view point and parent
view point)
- PPP (Purchasing Power Parity) holds for the Rp/US$ exchange
rate for the life of SI project (This is standard assumptions for
CEMEXs foreign investments.)
- Assume the initial spot rate is Rp 10,000/US$, projected
inflation rates; Indonesia 30% p.a and USA 3% p.a., thus the
forecasted exchange rate for year 1 of the project follow the
PPP calculation is Rp 12,621/US$
- Financial assumptions :
o Capital Investment
Cost of installed capacity, $/tonne : $110
Installed capacity : 20 million mmt/y, thus
Investment (US$) : $ 2,200,000 or
Investment (Rp) : Rp 22 trillion
o Financing
50% equity (all from CEMEX), 50% debt (75% CEMEX,
25% bank consortium arranged by Indonesian Gov).
CEMEX US Dollar based WACC : 11.98%. Indonesian
WACC : 33.275%
o Revenues and costs
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Cement export at $58/tonne (delivered)

Manufacturing costs : Rp 115,000 per tonne
Additional prod cost : Rp 20,000 per tonne
with 30% rate of inflation
Loading and shipping cost : $ 12 per tonne
with 3% rate of inflation
SI expected to gain accounting profit in year 2000
2.

Project viewpoint capital budget

The result of the capital budget from the project view point indicate
a negative NPV of Rp 9.4 trillion and Internal Rate of Return (IRR) of
only 15.4 % compared to 33.257% CoC. The project from this view
point is not acceptable.
3.

Parent viewpoint capital budget

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The result of the capital budget from the project view point indicate
a negative NPV of Rp US$925.6 million and Internal Rate of Return
(IRR) of 1.84 % co. The project from this view point is not
acceptable.

4.

Sensitivity Analysis : Project Viewpoint

Analysis to indicate what would happen to NPV and earnings
under a variety of what if scenarios for points :
- Political risks
e.g. :
a. What if Indonesia should impose controls on the payment
of dividends or license fee to CEMEX? . Continue
questions will be When and What
b. What if Indonesia should expropriate SI? . Continue
questions will be When and How much
-

Foreign exchange risks

e.g. : What if the rate of Rupiah depreciation were greater
than expected or even appreciated?

Other business specific potentialities.

e.g. :
a. The assumed terminal value.
b. The capacity of utilization rate
c. The size of license fee.

5.
-

Sensitivity Analysis : Parent Viewpoint Measurement

Adjusting discount rates : adjusting the discount rate
applicable to foreign projects to reflect the greater foreign

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6.
-

exchange rate, political risk, agency costs etc relative to the

rate used for domestic projects.
Adjusting cash flows : incorporate foreign risks in adjustments
to forecasted cash flows of the project.
Real Options Analysis
Real options is a different way of thinking about investment
values.
At its core, it is a cross between decision-tree analysis and
pure option-based valuation.
Real option valuation also allows us to analyze a number of
managerial decisions that in practice characterize many major
capital investment projects:
o The option to defer
o The option to abandon
o The option to alter capacity
o The option to start up or shut down

Recommendations
1. The investment plan was analyzed within the traditional
capital budgeting framework; they should include other
foreign complications including foreign exchange and political
risk in the analysis. Sensitivity and real option analysis could
also use as a reference to the result.
2. Parent cash flows must be distinguished from project cash
flows since each contributes to a different view of value.
3. Remittance of funds to the parents must be explicitly
recognized because of differing tax systems, legal and
political constraints on the movement of funds and local
business and capital market norms.
4. Differing rates of national inflation must be anticipated
because of their importance in causing changes in cash flows.
5. Foreign projects capital budgeting analysis should be
adjusted for potential foreign exchange and political risks.
6. Alternative methods are used for adjusting for risk, including
adding an additional risk premium to the discount factor used;
decreasing expected cash flows and conducting detailed
sensitivity analysis.

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