Nghe An Tate & Lyle Sugar Co. (Vietnam) Harvard Case Solution & Analysis

Question No. 1: What factors should Ewan Cobban consider making this investment decision? In other words, what are the IFC’s investment criteria and does this project meet them?

Answer:

INTERNATIONAL FINANCE CORPORATION (IFC)’S INVESTMENT CRITERIA:

Nghe An Tate and Lyle (NATL) have various equity sponsors, namely Tate and Lyle, the Miter Phol Sugar Company, the Vietnam Fund and the Nghe An Sugar Company, they have financed their project with their own equity, short term loans and a bridge loan from the bank called Rabobank who is the advisor and potential investor. Now the current status says that the investors have applied to International Finance Corporation (IFC) to refinance the loans taken from them. But the ongoing financial crisis of Asia has been preventing them to invest in the proposed project.

In order to get financed by the International Finance Corporation, project proposers must meet the following criteria:

  • The project proposer must be in a developing country, i.e. must being a member of International Finance Corporation.
  • The project must be in a Private Sector, i.e. the IFC doesn’t support Public or Government owned projects.
  • The project proposer must technically sound in term of their financial health.
  • The estimated project viability must be profitable, i.e. the estimated or expected Net Present Value of the proposed project must be positive enough.
  • The proposed project must be beneficial to the economy of the proposer’s country.

The project must be economically, socially and environmentally be safe and sound in order to satisfy the International Finance Corporation’s social and environmental standards and must also satisfy the proposer’s country laws and regulations.

In the given case, considering the above factors, Mr. Ewan Cobban should also make sure that:

  • Will the Proposer i.e. NATL be able to collect and purchase enough amount of cane from the country’s cane farmers?
  • Will the proposer country’s (Vietnam’s) government keep its promise to build the new roads and bridges in the locality of the project so that it will be helpful for the transporters to carry raw material (cane) to the mill from the various farms?
  • The major external threats that Mr. Cobbin is considering, is the price of the sugar in the whole world was falling and also that is sugar a protected commodity?

Question No. 2: How sensitive is the NPV / FRR to the various inputs?

Answer:

SENSITIVITY ANANLYSIS:

The main theme of the Sensitivity Analysis is like asking a question: “What IF”? As per the definition; it is the method to analyze, how much percentage of a certain input is required to change the whole viability of the project. Following is the explanation of calculations of the different factors analyzed in the Sensitivity Analysis as shown in Exhibit __:

SENSITIVITY OF TOTAL REVENUE TOWARDS THE NPV OF THE PROJECT:

  • In case of the Real Rate, if the Total Revenues of the project are decreased by around 15%, the NPV will fall to Zero and if decreased by more than 15% then the project will not remain viable, hence causing negative NPV.
  • In case of the Nominal Rate, if their estimates of Total Revenues of the project are decreased by around 18%, the NPV will fall to Zero and if decreased by more than 18% then the project will not remain viable, hence causing negative NPV.

SENSITIVITY OF TOTAL EXPENSES TOWARDS THE NPV OF THE PROJECT:

  • In the case of the Real Rate, if the Total Expenses of the project are increased by around 30%, then the NPV will fall to Zero and if increased by more than 30% then the project will not remain viable, hence causing negative NPV.
  • In case of the Nominal Rate, if their estimates of Total Expenses of the project are increased by around 37%, the NPV will fall to Zero and if increased by more than 37% then the project will not remain viable, hence causing negative NPV.

SENSITIVITY OF EARNINGS BEFORE INTEREST AND TAXES (EBIT) TOWARDS THE NPV OF THE PROJECT:

  • In the case of the Real Rate, if the estimate about the earnings before interest and taxes (EBIT) of the project is wrong and decreased by around 35%, then the NPV will fall to Zero and if decreased by more than 35% then the project will not remain viable, hence causing negative NPV.

In case of the Nominal Rate, if their estimates of earnings before interest and taxes (EBIT) of the project is decreased by 44%, the NPV will fall to Zero and if decreased by more than 44% then the project will not remain viable, hence causing negative NPV..................

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In September 1998, Paul Cooper, Chief Financial Officer Tate & Lyle for international investments, said the International Finance Corporation (IFC) is considering lending up to $ 45 million to finance the $ 90 million sugar factory in northern Vietnam. Ewen Cobban, IFC agricultural specialist, led the review of proposals and making credit recommendations to senior management. Cobban main issues were whether the plant was commercially viable and if it has the support of the government. He also fears that world sugar prices are falling, and that the sugar was protected goods. Before he could not recommend approval, he had to determine whether they are temporary or permanent problems. Cobban also knew that he would have to assess the impact on the development of the project. IFC supports only projects that contribute to sustainable development and a key factor in determining the sustainability of the degree to which the project was "fair" for all parties involved. Thus, Cobban must assess not only the individual income, but also social returns, as measured by the rate of economic profitability of the project (ERR). To do this, he would have to consider the various groups affected by the project and, where possible, to quantify the impact on them. "Hide
by Benjamin C. Esty, Carrie Ferman, Frank J. Bald Source: Harvard Business School 21 pages. Publication date: April 17, 2002. Prod. #: 202054-PDF-ENG

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