Financial Assessment for the

3/27/2018
Cement Manufacturing Facility
in LAOS

Submitted by

Marzouq Salman A Alresheedi

Meshari Thari M Alresheedi
Ayushi Mukesh Modh
Gaurav Sood
Dongyu Zhu

APOLLO 1
 Apollo 1,
University of Queensland
St Lucia, QLD, 4072
Australia

Date: 27/03/2018

Ms. Lakshmi Singh

CEO,
Apollo 1 Regional Headquarters,
EC-72, Sector I, Salt Lake City, Kolkata-700064, India

Dear Lakshmi,

Please find an enfolded copy of our final report listing out the financial factors and
methodology used for the financial analysis of a newly purposed cement plant in Vang
Vieng, Laos. This report was complied with reference to well reputed research
oriented sources. This report provides the following information:

• Background for this project.

• Financial analysis tools & techniques used for this research report.
• Sensitivity cost factor analysis that affects the future cash flows.
• Key recommendation for Apollo 1 enterprise.

Thank you for taking the time to read our report. Please feel free to contact me if you
have any questions.

Yours sincerely,

Gaurav Sood

Phone: +61414966387

Email: g.sood@uqconnect.edu.au
 EXECUTIVE SUMMARY
The Govt of Lao is inclined towards foreign investment in the sector of cement manufacturing
for Ordinary Portland Cement(OPC) to boost its export economy along with the aim to reduce
the high unemployment in the region. This represents an opportunity for our enterprise to
invest in OPC manufacturing project.

A preliminary investigation has shown that a site near Vang Vieng, 150 km north of Vientiane,
Laos is suitable for this OPC Plant(UQ7901, 2018). Limestone for cement production could be
sourced from many local quarries which eases the production process even more.

Apollo 1 Enterprise CEO Ms. Lakshmi Singh asked our team to evaluate this opportunity from
financial investment aspect with reference to future cash flows as the initial capital investment
of setting up this facility of US$250 million is substantial. To achieve this aim Apollo 1 team deep
dived into financial analysis of this project with focus to highlight the operational cost and
miscellaneous cost that affect the future cash flows from this unit as the proposed life span for
this OPC unit is around 40 years.

For financial analysis we used discounted cash flow analysis by calculating net present
value(NPV) and internal rate of return(IRR) for next 11 years from year 2022. From this analysis
we got a high IRR of 63% and a favorable NPV value of US$883 million at 10% discount rate.
Even sensitivity analysis was carried out to mark the most vulnerable factor which would
heavily affect future cash flows in negative terms.

Both NPV and IRR are suitably high for this project and thus, Apollo 1 team supports the
investment of substantial amount of capital in Laos for this project. As it is clear from the
Sensitivity Analysis that this project is most vulnerable to the rate at which this cement unit is
operated i.e. the operational production capacity rate. Therefore, we recommend that this OPC
unit is always operated at 85% or higher rates for optimal returns if it gets operational from
year 2022.

i
 Table of Contents

EXECUTIVE SUMMARY ................................................................................................... i

1. INTRODUCTION .............................................................................................................. 1

1.1. BACKGROUND ........................................................................................................................................1

1.2. OBJECTIVE .............................................................................................................................................1

2. FINANCIAL ASSESSMENT ...................................................................................... 1

2.1. METHODOLOGY USED FOR ASSESSMENT ...................................................................................1

2.2. FINANCIAL ASSESSMENT ..................................................................................................................1

3. CONCLUSION & RECOMMENDATION ......................................................... 3

3.1. CONCLUSION ........................................................................................................................................ 3

3.2. RECOMMENDATION .......................................................................................................................... 3

4. REFERENCES ................................................................................................................ 3
1. INTRODUCTION

1.1. BACKGROUND

As The Government of Laos is pushing for exports, construction boom and creating
employment opportunities in the region to reduce the high unemployment in the region,
The Government of Laos is inclined towards foreign investment in the sector of cement
manufacturing for Ordinary Portland Cement(OPC). This represents an opportunity for our
enterprise to invest in OPC project.

A preliminary investigation has shown that a site near Vang Vieng, 150 km north of
Vientiane, Laos is suitable for this development. This site is based on the eastern bank of
the Nam Song River, south of Vang Vieng(UQ7901, 2018). Limestone could be sourced from
many local quarries within a 50-km radius of the proposed site. This project could be
planned to be operational by year 2022.

1.2. OBJECTIVE

CEO Ms. Lakshmi Singh requested Apollo 1 team in the enterprise to evaluate this
opportunity from financial investment aspect to know the worth of this project with
reference to future cash flows as the initial capital investment is substantial.

2. FINANCIAL ASSESSMENT

2.1. METHODOLOGY USED FOR ASSESSMENT

To analyze the future gains from this project to our enterprise, the following tools and major
assumptions are being used(UQ7901, 2018):

• DCF (Discounted Cash Flows) Analysis on real discount rates (No Inflation aspect is
considered) for first 11 years of operation from 2022.
o IRR (Internal Rate of Return to Investors).
o NPV (Net Present Value of the Money).
o Sensitivity Analysis for the variables involved in the future cash flows of this
cement unit.
• Depreciations aspect for capital investment is also not considered for tax benefits
on cash flows.

2.2. FINANCIAL ASSESSMENT

There are certain pre-requisite assumptions which have been considered for DCF Analysis
and are mentioned as below:

1
 • US 1 dollar = 8000 kip.
• Corporate Tax in Laos = 24% (PWC, 2017).
• Operational Years: 2022 to 2032 (Sample for DCF ANALYSIS).
• Discount Rate: 10 % (Before Tax).

DCF ANALYSIS:

For this analysis we have prepared an excel sheet with detailed calculations of future
cashflows which could be referred while reading this report. Before this OPC unit starts
producing any cement it needs a substantial investment for its own establishment. It will
require US$250 million for the base plant and an additional US $30 million will be required
to establish Tire Derived Fuels facility to use tire as fuel for clinker production which will
help in long run to cut down cost of production. US$1 million will need to be dispensed to
local landowners for using their lands each year along with US$1.1 million each year as a
part of corporate social responsibility program to community tourism operators as
construction activities might disrupt tourism in Vang Vieng(UQ7901, 2018).

Starting with production capacity for this purposed cement plant in Laos, it has an annual
capacity of 3.5 MTPA (Metric Tons Per Annum). Looking at the current Laos market for
cement consumption which is approximately around 2 MT(Metric Tons), this facility is
capable of meeting 30% of that total demand as other competitors are providing the rest
of the percentage(UQ7901, 2018). It’s expected that Laos’s cement requirement will
increase in coming years as there are a lot of dam projects planned in coming
years(Wikipedia, 2017). While looking at the rest of 2.375 MTPA from this new plant can be
exported to other neighboring countries of Laos especially to Thailand(ANN, 2018). Sales
from this project are primarily focused on export as they can fetch higher value in revenue
than domestic market (UQ7901, 2018).

It is not possible to run this production unit at 100 % capacity, hence we will only consider
85 % efficiency. With that in mind we are looking at US$333 million revenue for one year
starting from year 2022 till 2032 with no further capital investment apart from the following
costs each year:

• Fixed cost for single year US$8 million(Approx.).

• Variable cost for single year US$84.1 million(Approx.).
• Total Shipping cost for single year US$2 million(Approx.).
• Corporate Tax for single year US$57 million(Approx.).
• Corporate Social Responsibility Program cost for single year US$ 1.1 million. (Starting
from year 2019)
• Landowners account cost for single year US$1 million. (Starting from year 2019)

After subtracting all the above-mentioned cost from the revenue, we are left with net cash
flow for that year. We then calculated the discounted cashflow with the discount rate for
each year. Thus, after adding all the discounted cashflows from year 2019 to 2032 we got a
NPV which is US$883 million (Approx.). We next calculated the IRR which is a discount rate
at which NPV is 0 and is used to evaluate the attractiveness of a project which comes out
to be 63% (Approx.) which is very high.

2
 Sensitivity analysis for NPV was also carried out by changing one cost factor at one time
and recording that NPV to look for the most vulnerable factor of cash flows and below are
the findings in Table 1. The Pessimistic NPV column refers to the effect of the most
unfavorable factor on NPV. The Optimistic NPV column refers to the effect of the most
favorable factor on NPV. NPVopt – NPVpess column shows us the factor which changes
NPV by a great amount.

Table 1. Sensitivity Analysis

Expected NPV -
85% Production
Variables Pessimistic - NPV rate Variables Optimistic- NPV NPVopt - NPVpess
Production Production
rate - 65% $594,205,040.00 $883,903,467.00 rate - 100% $1,101,177,287.00 $506,972,247.00
Fixed cost Fixed Cost
@ $5 $851,595,735.00 $883,903,467.00 @ $1 $910,337,066.00 $58,741,331.00
Variable Variable
cost @ $32 $829,127,175.00 $883,903,467.00 Cost @ $25 $931,924,506.00 $102,797,331.00

3. CONCLUSION AND RECOMMENDATION

3.1. CONCLUSION

Both NPV and IRR are suitably high for this project and thus Apollo 1 team supports the
investment of substantial amount of capital in Laos for this project.

3.2. RECOMMENDATION

As it is clear from the Sensitivity Analysis’s Table 1 “NPVopt -NPVpess” column that this
project is most vulnerable to the rate at which this cement unit is operated i.e. the
operational production capacity rate. Apollo 1 team recommends that this cement unit is
always operated at 85% or higher rates for maximum returns.

4. REFERENCES
ANN. 2018. Laos to focus on cement exports, environmental protection [Online]. Available:
http://annx.asianews.network/content/laos-focus-cement-exports-environmental-
protection-64367 [Accessed].
PWC. 2017. LAO PDR [Online]. Available:
http://taxsummaries.pwc.com/frmTerritoryPrintPreview?openForm&countryName=Lao%20
PDR&Type=Corporate [Accessed].
UQ7901 2018. Project Brief 1 ENGG7901 2018.pdf.
WIKIPEDIA. 2017. Dams and reservoirs in Laos [Online]. Available:
https://en.wikipedia.org/wiki/Dams_and_reservoirs_in_Laos [Accessed].