Reference no: EM133113766

Task #1:  Baroda Limited Role and Context Scenario 

You are a financial analyst in the capital projects department of Baroda Limited (BLD), which is a construction material and building products supplier with operations in all states and territories of Australia. BLD supplies high quality cements, cement blends concrete, Portland composite cement production, sand, ready-mix concrete, quarry products, asphalt and roof tiles to build infrastructure, residential construction and commercial buildings. Recently, BLD has owned 50% joint venture with USC Corporation, which is a leading supplier of Portland cement, sands and bricks across Asia and Australia. USC BLD has a large and expanding capital budget in Australia, New Zealand, China, Indonesia, Malaysia, Philippines, Singapore and Saudi Arabia. While BLD has a large and expanding capital budget, it is currently considering which of two possible (international and domestic) projects it should invest in, both of which would be used to manufacture cements (high-quality cements from bulk cement products) and cement blends concrete to Portland cement and Portland Composite Cement production over a 10-year operating period. 

The first project, the Kuala Lumpur Cement, is a proposed new project in Malaysia, about 50 km outside the capital city. BLD has been considering this expansion for a number of years and believes that the combination of low wages, looser environmental protection, and proximity to its emerging markets in South East Asia will makes this new cement plant an attractive addition to its existing facilities. Specifically, in 2021 the Kuala Lumpur project will require the purchase of land for $2.6 million, with development and construction building costs of $13 million, and plant and equipment costs of $6 million. BLD will also need to spend on working capital each year. The change in net working capital is estimated to be 4% of the change in sales every year during the life of the cement project (the exception being the last year of the project which reverses the sum of all previous cashflows due to working capital). Sales are estimated to be $45 million in 2022, the first-year sales, increasing by 10% per annum after that. The cost of goods sold is 66% of sales. Fixed costs will be $12 million in 2022, increasing by 5% per year. Both buildings, and plant and equipment will be depreciated straight line to zero over the 10-year project life. The buildings will have a salvage value of 20% of cost and the plant and equipment will have no salvage value. At the end of the project, BLD will rehabilitate the site and sell the land for housing industrial development for $16 million. The company tax rate in Malaysia is 24%. 

The second project, the Cairns Cement Plant, is a modification of an existing plant BLD already owns in the Cairns city of Queensland. The Cairns Cement Plant has been idle for a number of years, but with renovation it would be well suited to Portland cement, Portland Composite Cement production. If not used for the proposed project, BLD will lease out the existing cement plant for $70,000 per year. The estimated development and construction building costs will be $16 million in 2021 alongside plant and equipment investment of $5 million. BLD will again need to invest in working capital, thus the change in net working capital is estimated as 4% of the change in sales every year (the exception being the last year of the project which reverses the sum of all previous cashflows due to working capital). Sales will be $55 million in 2022, increasing by 7% per annum thereafter. Given the relative geographic isolation of the stricter environmental controls given the proximity to the south-eastern part of the Great Barrier Reef, the cost of goods sold will be 70% of sales. Fixed costs will be $5.2 million in 2022, increasing by 5% per year. Both buildings, and plant and equipment will again be depreciated straight line to zero over the 10-year project life. The buildings will have a salvage value of 30% of cost and the plant and equipment will have no salvage value. At the end of the project, the Cairns Cement Plant will again revert to being idle awaiting potential future developments at no cost. The company tax rate in Australia is 30%. 

Task 

Provide a report to BLD's CFO, Mr. David Wagner, recommending which of these two mutually exclusive projects BLD should invest in, if any. Your recommendation should be supported by appropriate calculations. Assume BLD has a cost of capital of 12% for domestic projects and 16% for international projects.