Thunderbird Case

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Case #: 
A06-15-0016

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Author(s):

Abstract: 

Agus Halim, the CEO of PT Diamond Energy Resources Indonesia, a wholly owned subsidiary of an Australian-based mining company, was contemplating whether to invest in a new coal mine near East Kalimantan, Indonesia. His consultant had prepared a preliminary acquisition plan that included a capital budget with verified mineable surface coal reserves and projected coal prices. This acquisition would add to Diamond’s coal reserves and position it as an important player in the coal export market in Indonesia. Before getting the green light from his parent firm, Agus needed to ensure this investment would create value for the firm. He also needed to convince his local banker to provide the necessary financing in a challenging environment with
very volatile commodity prices.

Teaching: 
This case may be used in a core finance course, energy or commodity industry courses, either undergraduate, graduate or executive programs, to familiarize students with investment or capital budgeting decisions in commodity-based industries. It allows students to conduct sensitivity, scenario or breakeven analyses in a discounted cash flow (DCF) model. Students will need to estimate the weighted average cost of capital (WACC), using a capital asset pricing model (CAPM) for cost of equity calculation. With the free cash flows and WACC calculated, students may then use the different capital budgeting measures such as NPV, IRR, payback period, and profitability index to determine if the project creates value for the firm. The case is a hands-on way to apply the concepts of DCF analysis and WACC.
Year: 
2015

Industry:

Setting: 
Indonesia-Australia
Length: 
7 pages
Source: 
Library

Subject: