Project Financing Case: “Nghe An Tate & Lyle Sugar Company (Viet Nam)”

Topics: Net present value, Investment, Time value of money Pages: 8 (1078 words) Published: September 9, 2014
SESSION 4: PROJECT FINANCING

Case: "Nghe An Tate & Lyle Sugar Company (Viet Nam)"

_Question 3: Are farmers likely to convert to sugar cane?_

The farmers who lived within 50 kilometers of the sugar mill are likely to convert to sugar cane in term of economic return and other benefits.

- Economic return: Net returns to farmers per Hectare from growing Sugar cane are high. From Exhibit 9 with nominal cash flow of a crop life cycle ( 4 years), the total return of one hectare is 6,900 (000'VND) and net present value is 3,841 (000'VND) with nominal discount rate 13.3%/year. Compare to coffee and rubber, sugar cane need only one year to revenue.

Compare with other crops (pineapple, coffee, rubber …), Sugar cane can get highest average economics per year from exhibit 10 as below:

Unit: Dong per hectare

Sugar

Pineapple

Coffee

Rubber

Peanuts

Peanuts

Peanuts

cane

and Maize

& peanuts

and Rices

Number of years

420

420

420

420

420

420

420

Planting years

105

140

168

120

0

0

0

Typical years

315

280

252

300

420

420

420

Revenue

2,835,000

3,955,000

4,536,000

3,000,000

2,856,000

4,032,000

3,853,500

Total Costs

2,110,500

3,255,000

5.021,100

3,097,500

3,696,000

3,864,000

3,906,000

Total net return

724,500

700,000

-485,100

-97,500

-840,000

168,000

-52,500

Return per year

1,725

1,667

-1,155

-232

-2,000

400

-125

Note: 420 is lowest common multiple of crop life cycle (4,3,10,28) and assume that time value of money is ignored (no discount cash flows to present value).

From exhibit 11, Net return from Cane also get highest net present value for period from 1998 to 2015 with nominal discount rate 13.3% per annum and opportunity cost of labor is $1.00/day: NPV Cane +21,599; NPV pineapple +3,865; NPV coffee -9,998; NPV rubber -20,664, NPV combo A -12,777; NPV combo B +2,555, NPV combo C -799 (US$ in thousands).

- Other benefits: One of three parts of NATL's development plan is an outreach program to help local farmers to convert to cane production which means that their sugar cane will have more added values because cane production can sell with higher price and the farmers can use their products.

The company expected to employ 725 people, provided in-house training so many members of the farmer family can become workers, educated ones can also become staffs. This will create many good affects to the local farmers.

The project would need roughly 300 lorries during the harvest season so some farmers can borrow money from local banks to buy new haulers to transport cane to the factory.

With many benefits as above, before converting to sugar cane the local farmers need to understand/know the risks of converting:

The first risk is to avoid converting too much from the beginning of the project. The factory will reach full capacity by the 2002/2003 harvesting season, so for the period from 1998 to 2002, the numbers of hectares convert to cane need to increase accordingly.

Second risk is related to the NATL's complex payment system, with the first installment, approximately 75% of the total, would be made within 14 days of delivery and the rest would be made at the end of the season with adjustment for sugar content and market price. The local farmers seem too familiar with simple full payment upon delivery even though with lower price, many poor farmers can have enough cash for their daily life and no effected by adjustment with the old payment method.

With these analysis's, the famers will have much more benefits, some related risks can be considered and controlled so I believe that they will convert to sugar cane.

_Question 4: Will the government support the project?_

The Vietnamese government will strongly support the project in term of both...
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