Question

EXHIBIT 18.5 Semen Indonesia Capital Budget: Project Viewpoint (millions of rupiah) 25,376 32,028 5 1,219,029 2,739,0674,744,982 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) 10,000 12,621 15,930 20,106 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 NwO net working capital NPV-net present value. Discount rate is Semen Indonesia's WACC of 3325790 IRR-internal rate of return, the rate of discount yielding an NPV of exactly zero. Values in exhibit are exact and are rounded to the nearest million. 4 1,760,000 1,760,000 1,760,000 1,760,000 (22,000,000) 21,274.102 (22,000,000) 2,372,650 3,538,319 4,886,09 5,846,764 28,158.896 (7,606,313) 19.1% This 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 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.

USE EXCEL!

Answer 1

Computation of NPV and IRR:

1) EBIT decline by 10%:
Project year	0	1	2	3	4	5
EBIT		1,097,126.10	2,465,160.30	4,270,483.80	5,448,230.10	6,833,646.90
Les: tax at 30%		(329,137.83)	(739,548.09)	(1,281,145.14)	(1,634,469.03)	(2,050,094.07)
Add: depreciation		1,760,000.00	1,760,000.00	1,760,000.00	1,760,000.00	1,760,000.00
Net operating cash flows		2,527,988.27	3,485,612.21	4,749,338.66	5,573,761.07	6,543,552.83
Less: changes in net working capital		(240,670.00)	(139,028.00)	(195,379.00)	(150,748.00)	(190,265.00)
Initial investment	(22,000,000)
Terminal value						21,274,102.00
Free cash flows	(22,000,000)	2,287,318.27	3,346,584.21	4,553,959.66	5,423,013.07	27,627,389.83
discounting factor at 33.257%	1	0.750430	0.563145	0.422600	0.317132	0.237985
PV at 33.257%	(22,000,000)	1,716,471.38	1,884,610.88	1,924,505.18	1,719,810.21	6,574,908.25
NPV	(8,179,694)
IRR	18%
2) EBIT decline by 20%:
Project year	0	1	2	3	4	5
EBIT		975,223.20	2,191,253.60	3,795,985.60	4,842,871.20	6,074,352.80
Les: tax at 30%		(292,566.96)	(657,376.08)	(1,138,795.68)	(1,452,861.36)	(1,822,305.84)
Add: depreciation		1,760,000	1,760,000	1,760,000	1,760,000	1,760,000
Net operating cash flows		2,442,656.24	3,293,877.52	4,417,189.92	5,150,009.84	6,012,046.96
Less: changes in net working capital		(240,670)	(139,028)	(195,379)	(150,748)	(190,265)
Initial investment	(22,000,000)
Terminal value						21,274,102
Free cash flows	(22,000,000)	2,201,986.24	3,154,849.52	4,221,810.92	4,999,261.84	27,095,883.96
discounting factor at 33.257%	1	0.750430	0.563145	0.422600	0.317132	0.237985
PV at 33.257%	(22,000,000)	1,652,435.70	1,776,636.52	1,784,138.99	1,585,425.20	6,448,417.75
NPV	(8,752,946)
IRR	17%