Investments

FAST TRACK
INVESTMENTS
Fast Track / Investment / Institut Cimentier / 1

1
A FEW REFERENCE MARKS

1.1 / Transversal work
 Transversal work : in order to gather relevant

information, you need to call on many
competent contacts, so as to find from each
of them elements that allow success.
 ONE CANNOT BE A SPECIALIST IN EVERY FIELD

1.2 / Contacts within the Lafarge
organization
LAFARGE
FINANCIAL DIRECTION
OPERATIONAL UNITS
TECHNICAL CENTERS PLANTS

1.3 / Key principles
 To invest better, you have to :
1 consider investment as a mean, not as a finality

2 invest for the right need
3 find a reversible / flexible solution
4 take safety and environment into account

2
HOW TO DEVELOP AN
INVESTMENT PROPOSAL
2.1 / Generalities

2.1.1 / Why invest ?
Risk
Strategy
Technique
Adapted
investment
Market
Profitability

2.1.2 / A few questions
?
 What are my goals ? (in accordance with my strategy?)
 What is the best way of reaching them ? (alternatives, without
investment?)
 Why now ? (can I delay the investment? am I flexible?)
 Why in this way ? (are there other choices ?)
 Can I measure the results ? (are my aims clear and
quantifiable ?)
 In summary : is this the best option ?

2.2 / Elements of a
good investment proposal

2.2.1 / Investment is a cycle
Impact on
Needs profitability Technical choice
Audit,
analysis
Investment Estimate/proposal
Commissioning Assembly, Purchase

Safety

2.2.2 / What criteria for my technical choice?
«desired» Minimal
«adapted» operating costs
Performance
Safety
Technical solution
Society Maintenance
standards
Useful life, Future : norms,

Resale equipment, plant development,
supplier usefulness,...

2.2.3 / EXERCISE n°1 (1)
Technical choice
 Change a transformer and the linkage cable which
will incur an increase of 1 MW.
We know that other projects are being studied.
 Today :
1 MW
0.5 MW
2 MW

Solution 1: 1000 KF
1 MW
0.5 MW (2)
3 MW
1 MW (1997)
Solution 2: 2500 KF
1 MW
10 MW 0.5 MW
1 MW (1997)
1 MW (1998)
Solution 3: 1400 KF
1 MW
Interesting price but
6 MW 0.5 MW
technology soon
1 MW (1997) becomes obsolescent
1 MW (1998)
Solution 4: 1600 KF same solution as 3 but with a new technology

2.2.4 / How to choose a supplier
Specifications Bids
Accordance with
Price Competence
specifications
Performance Choice of supplier Guaranty
Company rules Delays Safety

2.2.5 / PURCHASING : a few reminders (1)
 Better to choose a wording in terms of goals, results, and of

function rather than of means or of a predefined solution.
 Ex : compressor : flow 100 m3/h

pressure 7 bars
 Compare what can be compared => look at the problem

from all technical sides (results, ratios...)
 Have a global approach rather than an acquisition cost
approach : think long term!
e.g. : acquisition, installation, training, maintenance and
running costs
(2)
Offer surveying
COMPARING 2 TECHNICAL OFFERS

2.2.6 / EXERCISE n°2
comparing offers
 SPECIFICATIONS : weatherboarding : 100 m², white, standard quality,

on a building at a height of 10m.
 OFFER n°1 :
Company 1 : Price : 85.000 FF
 OFFER n°2 :
Company 2 : - laying of a 100 m² weatherboarding
- supplies : 10.000 FF
- mounting : 35.000 FF
 OFFER n°3 :
Company 3 : - laying of a 100 m² weatherboarding - supplies :
23.000 FF
- mounting : 37.000 FF
- safety measures :
crane rental : 15.000 FF
erection of scaffolding : 17.000 FF

2.2.7 / The cost of investment
External Environmental
Environment rules and regulations
Internal Technical Studies
Engineering Dismantling
Authorization Salvage and Cleaning
Architect
Administration waste disposal
Mechanics Connections
Painting (aesthetics) parts, assembly
Assembly Electricity Electrical

crane, generator set Technical parts, wiring network
Solution
Image Maintenance
Spare parts Compressed Compressed
air air network
Safety
Water
Infrastructure Water network
Training
Lighting, ventilation. Foundation
"VRD"
Traffic (drains, gutter...) Ground quality (drilling?)

2.2.8 / The success of investments
is a joint effort
Assembly
Studies Commissioning
Steps
SAFETY
Services
Investment Production
Maintenance
Team-work and coordination at each step

2.2.9 / Safety
1
 Prepare and live safety from conception to realization
 The role of the leader :
 define modus operandis
 make sure they are applied
 check the variations
 When facing a danger : evaluate the risk

 analyze the risk
 suppress the risk
 replace by less hazardous risks
 implement collective safety
 provide individual safety devices

Example of check-list
Risks
(Circle in case of choice)
Exists
CL
Created by
EE Other
Observations
Instructions
2
ELEVATED WORKS
- falling down
- falling of an object
- collapse
-
WORK SITE INTERFERENCE
- superposition/same place
- lifting machines
- travelling crane
- work site machines/trafic
- welding/blowtorch
-
OPERATING SHOP INTERFERENCE
- moving machines
- ventilator gas
- material
-
ENVIRONMENT
- dust/heat/noise
- confined atmosphere
- fire/explosion risk
- pollution risk
- climatic conditions
-
UTILITIES / FUELS
- water/air/steam
- circuit/stock fuels
- dangerous products
-
ELECTRICAL DANGER
- tension proximity
- intervention on driver
-
OTHER
- hydraulic test
- specific access conditions
-

Active Safety
3
 Organize - Coordinate
 Safety must be prepared but also changes with the building site :
 Grounding system forgotten
 +/- absent site foreman
 Uncertain scaffolding
 +/- authorized visitor
 Acrobatic handling
 Falling objects
 Climatic conditions
 Delay of an operation POTENTIAL

 Obstructed work space RISK
 Non adapted protection
 Surrounding problems, lighting
 .......

Active Safety
4
Organization - Coordination
Appropriate intervention conditions
Locking out
Protection and adapted devices
Tidy/clean site
Site environment
2.2.10 / Example of investment planning
GANTT - PERT

2.2.11 / Commissionning
FOR A SUCCESSFUL COMMISSIONNING :
 Take users' needs in account as early as conception

 Test period prior to the commissioning
(testing of the equipment, safety...)
 Users have been trained and know the equipment when it
is handed to them ( plans, directions for use,
maintenance ...)

3
FINANCIAL
PART

3.1 / What is investing ?
 Investing means forgoing the profits of today in order to

increase the profits of tomorrow
 3 factors
 CAPITAL
 SURPLUS
 TIME
 An analysis of profitability must take into account the

developments linked to these three factors
 There must be a distinction between maintenance investment
and development investment

3.2 / How to assess profitability ?
Lafarge uses the following 4 criteria :

 IRR (Internal Rate of Return) based on free cash flow (return rate when
the net present value equals zero) ;
 NPV (Net Present Value) based on free cash flow (present value of future
cash flows minus capital expenditures) ;
 Pay-Back based on cash flow and length of time necessary to recuperate
amount invested ;
 RONA (Return Of Net Assets) based on the relation between profits,
before financial expense and taxes, and capital expended.

3.3 / EXERCISE n°3
At first sight, which one of the following investments is the

most profitable?
(A) I invest 100 and earn 15 a year

(B) I invest 20 and earn 5 a year
What happens if I find 4 other projects similar to (B) ?
What important factors are missing to take a decision?

3.4 / Discounting 1
 What is discounting?
 With a rate of 10%, 100 francs next year are worth
100 = 90.9 francs today.

(1+0.1)
 100 francs in two years are worth
100 = 82.6 francs today.

(1+0.1)²

3.4 / Discounting
2
Exercise
I borrow 100 from my bank at a rate of 10%, for 5 years.
In total, I must pay back 126.
I invested 100 and earned 150.
=> I refund the 100 to the bank

=> I pay for the cost of the loan : 26
=> I get a surplus of 24
How did I get this surplus of 24 ?

What happens if I only get this surplus during the fifth year ?

3.5 / EXERCISE n°4
1
The quarry owns 2 old dumpers
 Annual maintenance costs : 150KF/dumper because of wear and tear
 Maintenance can be reduced by 50 KF if the engines were changed
(100KF per engine)
 On one of the dumpers, the speed gear box must be replaced : 80 KF
We intend to replace both dumpers : is it justifiable ?

Cost of a new dumper : 300KF
Annual maintenance costs : 50KF

2
Reference situation
Investment -80
Maintenance 300 300 300
Solution 1 (1 gear box + 2 engines)

Investment -280
Delta -200 100 100 100
Solution 2 (1 new dumper + 1 engine) Materials for answer

Investment -400
Delta -320 150 150 150
Solution 3 (2 new dumpers)

Investment -600
Delta -520 200 200 200

3.6 / Internal Rate of Return - IRR
1
 The IRR is the rate which balances :
 The total initial investment
 And the present value of financial cash flows generated by
this investment
 Example for an initial investment of 100F :
 Year 1 collection : 60
 Year 2 collection : 55
100 = 60 + 55 x = 0,1 i.e. 10%
1.x (1.x)²
2
 The Internal Rate of Return is the interest rate
realized on top of initially invested sums, as for a
loan.
 Ex. loan of 100 at a rate of 10% for 2 years
Year Capital owned Interest Redemption Total

1 100 10 50 60
2 50 5 50 55
which is equivalent to our investment of 100F

generating 60F the first year and 55F the second year
3.7 / Net Present Value (NPV)
 For a given discount rate, the NPV is the sum of discounted

cash flows (present value) and initial investment (net)
 Example :
start yr 1 end yr 1 end yr 2 end yr 3
Cash flow (1200) 500 600 500
discounted 10% (1200) 454 496 376
Present value : 1326
 Net present value equals : (-1200) +1326 = 126

3.8 / How to Calculate Free Cash-Flow
OPERATING INCOME ( increase in sales)
+ OPERATING SAVINGS
OPERATING EXPENSES ( increase in operating costs generated by the

- investment)
- TAXES (calculated with fiscal depreciation)
- CHANGES IN WORKING CAPITAL
= OPERATING CASH FLOW
- INVESTMENT
= FREE CASH FLOW

3.9 / How to Calculate the Rona
Two Approaches
Accounting RONA Economic RONA

Gross operating income Gross operating income
- depreciation provision or - Maintenance investment
Asset value Market value

3.10 / EXERCISE n°5
A plant was purchased for 100 MF.

Development investment rises to 80 MF.
Sustaining investments are 6 MF for the current year.
A divestment of some assets is made : 12 MF.
This year, the plant gains an RBE of 28 MF before
exceptional costs.
Calculate the RONA for the current year

3.11 / Why combine these criteria ?
10000 9000
8000
5000
Estimated Cash-flows
7000
0 6000
NPV 1
-5000
5000
NPV 2
IRR = 20% 4000
-10000 IRR = 20%
3000
-15000
2000
Project 1 Project 2 1000

-20000
0

3.12 / EXERCISE n°6
1
 Profitability case study :
Problem at the entrance of the kiln : a valve clamps
regularly.
Annual maintenance cost : 100 KF
Kiln reliability : - 0.2 %
Proposal :
Set a new valve up with an electrical engine (20 KW)
Cost of the investment : 210 KF

2
 What it brings in :
• reduction of repairs : 100 KF a year
• increase in clinker tonnage through better liability
(estimated to 0.2% x 330 days x 1 300 t/day = 850 t/year)
=> electrical profit and fuel : 75 KF a year
 What it costs :
• electricity : 20 kW x 24 x 330 x 0.30F / kWh = 47 KF / year
• maintenance of the engine : 10 KF/an
 Useful life : 10 Inflation: 0%

End value : 0 Tax: 40%

3
NPV and IRR
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Savings 175 175 175 175 175 175 175 175 175 1 75
Charges -57 -57 -57 -57 -57 -57 -57 -57 -57 -57
investment - 210
Year 1 2 3 4 5 6 7 8 9 10
RBE 118 118 118 118 118 118 118 118 118 118
Depreciation 63 44 31 22 8 8 8 8 8 8
Taxes 22 30 35 39 44 44 44 44 44 44
RBE - taxes 96 88 83 79 74 74 74 74 74 74
WCR 0 0 0 0 0 0 0 0 0 0
Investment -210
Free Cash-Flow -114 88 83 79 74 74 74 74 74 74
IRR 72 %
NPV 326

4
Pay-Back RONA for 3 years
1995 1996 1997 1995 1996 1997
Cash-Flow 96 88 184 RBE-linear deprec. 97 97 97

Investment 210 Capital (start) 210 210 168
Payback (2 years) 88% Capital (end) 189 168 147
Average capital 200 179 158

BFR (start) 0 0 0
BFR (end) 0 0 0
Average BFR 0 0 0
Average capital 200 179 158
RONA 49% 54% 62%

3.13 / EXERCISE n°7 1
Recap of the technical and financial parts
 Project
 Cash-Flow
 IRR
 Pay Back
 RONA

2
CASE STUDY : waste oils installation.
Profitability calculation
A Environment :
see handout

3
B Arrangement suggested by the research department :
new oil south

filter storage post
.
old present
cyclones control room
location chosen
for a receiving area
kiln new location of the

central control room

3.14 / Financial Expertise
Rate of return calculation spreadsheet

3.15 / Risks
 To invest = engaged capital and expected future revenues

 The future is closely linked to the uncertain economic
environment; one therefore risks not recuperating one’s capital
 A means of reducing these risks is to offer flexible alternatives
which permit the adaptation to changes and preserve
profitability even if the market does not perform well
 Profitability is not the sole criterion, flexibility is also important
 Some investments can prove to be mandatory : for example,
investments linked to environmental constraints

3.16 / Example about risks 1
Two similar plants with 4 kilns Market high medium low
decide to renovate : Solution 1 25 13 7
 plant 1 chooses to build a new Solution 2 20 17 16
kiln to respond to a high level
market Solution :
 plant 2 chooses to fully
Solution 1 offered the best profitability,
renovate 2 kilns for long term, a had the market been high.
third one for short term
Solution 2 did not seem as good but was
(minimal investment). If the flexible .
market takes off, possibility to
In actual facts the market turned out to
renovate the 4th kiln which
be low, plant 2 will not renovate its 4th
would work for 3 years. kiln and will have a better profitability
than plant 1.
2
Market as seen in 1991
Actual market in 1995
Plant 1
Plant 2
2400
2200
2000
1800
1600
1400
1200
1000
800
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

4
PROCEDUR
E

4.1 / Investment process
Proposed budget
Sum of the projects
Projects
Authorization given for the spending Approval of

of total amount of the mobilized project after
credit and for the proposed project reading of
investment proposal
Funds mobilized
for a project

4.2 / Where can information be found ?
WHO IS INVOLVED ?
Plant
Technique
Lafarge Technical services
Supplier
Purchasing Buyer
Market Commercial
Profitability Finance
4.3 / Investment proposal / Introduction
 Short description
 Goals researched, needs, implementation
means, technical solutions, profitability
 Technique
 Description, detailed estimate (by category),
deadlines, description of work
 Profitability study
 Hypothesis, costs/savings, profitability

4.4 / Advice
 Explain clearly and coherently the hypotheses.

 Calculate the profitability in relation to a reference
situation.
 If it is difficult to quantify profits, is the objective clear?
 Do not construct hypotheses around an investment to
justify profitability (masking costs or overestimating
earnings).
 Do not mix investments : calculate separately for
independent investments.
 There is not only one solution, show the alternatives and
explain why your solution is the best.

4.5 / Control of an investment budget
Budget # Amount Date

K 001 1000 08. Dec 97
Item Budget Order Left to order Probable Paid Variance Budget/probable
filter delivery 300 320 0 320 170 20

civil engineering 150 125 0 125 65 -25
electricity 150 125 20 145 25 -5
assembly 200 200 200 0
compressed air 100 100 100 0
dismantling existing installations 50 50 0 50 0
architect 50 46 0 46 -4
Total 1000 666 320 986 260 -14

4.6 / Analysis of the results (audit)
 After investment  Data bank

 Budget (predicted/actual)  Offer
 Supplier (quality)  Choice
 Delays  Supplier
 Problems  Figures
 Commissioning  Study
 % (civil, electrical, and  Safety
mechanical engineering...)  ...
 Profitability after a year  What can be improved for next

 Predicted / actual
investment?
 Earnings
 Costs  What can I improve?

 Profitability

Investments

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FAST TRACK

Fast Track / Investment / Institut Cimentier / 1

Fast Track / Investment / Institut Cimentier / 2

 Transversal work : in order to gather relevant

 ONE CANNOT BE A SPECIALIST IN EVERY FIELD

Fast Track / Investment / Institut Cimentier / 3

TECHNICAL CENTERS PLANTS

Fast Track / Investment / Institut Cimentier / 4

 To invest better, you have to :

1 consider investment as a mean, not as a finality

Fast Track / Investment / Institut Cimentier / 5

Fast Track / Investment / Institut Cimentier / 6

Fast Track / Investment / Institut Cimentier / 7

Fast Track / Investment / Institut Cimentier / 8

good investment proposal

Fast Track / Investment / Institut Cimentier / 9

Commissioning Assembly, Purchase

Fast Track / Investment / Institut Cimentier / 10

Useful life, Future : norms,

Fast Track / Investment / Institut Cimentier / 11

Fast Track / Investment / Institut Cimentier / 12

Fast Track / Investment / Institut Cimentier / 13

Performance Choice of supplier Guaranty

Company rules Delays Safety

Fast Track / Investment / Institut Cimentier / 14

 Better to choose a wording in terms of goals, results, and of

 Ex : compressor : flow 100 m3/h

 Compare what can be compared => look at the problem

COMPARING 2 TECHNICAL OFFERS

Fast Track / Investment / Institut Cimentier / 16

 SPECIFICATIONS : weatherboarding : 100 m², white, standard quality,

Fast Track / Investment / Institut Cimentier / 17

Assembly Electricity Electrical

Fast Track / Investment / Institut Cimentier / 18

Team-work and coordination at each step

 make sure they are applied

 check the variations

 When facing a danger : evaluate the risk

 suppress the risk

 replace by less hazardous risks

 implement collective safety

 provide individual safety devices

Fast Track / Investment / Institut Cimentier / 20

Fast Track / Investment / Institut Cimentier / 21

 +/- authorized visitor

 Delay of an operation POTENTIAL

 Surrounding problems, lighting

Fast Track / Investment / Institut Cimentier / 22

Appropriate intervention conditions

Protection and adapted devices

Fast Track / Investment / Institut Cimentier / 24

FOR A SUCCESSFUL COMMISSIONNING :

 Take users' needs in account as early as conception

Fast Track / Investment / Institut Cimentier / 25

Fast Track / Investment / Institut Cimentier / 26

 Investing means forgoing the profits of today in order to

 An analysis of profitability must take into account the

Fast Track / Investment / Institut Cimentier / 27

Lafarge uses the following 4 criteria :

Fast Track / Investment / Institut Cimentier / 28

At first sight, which one of the following investments is the

(A) I invest 100 and earn 15 a year

What happens if I find 4 other projects similar to (B) ?