PORTAL TAMBANG

MiningHub Indonesia

MINING
ECONOMICS
COURSE
FINANCIAL
ANALYSIS
Basic Principles

❑Time Value of Money  Tomorrow is not as

valuable as today
❑Discount rate

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Discount Rate

 Mechanism used to convert future cash flows

into todays equivalent value, which is known
as present value or discounted value
 Discounted Cash Flow Analysis encounters a
problem in determining the appropriate
discount rate

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Discount Rate

❑ Opportunity cost of capital Foregone benefits that would have been

received from the next best investment opportunity
❑ Risk-free alternative  Return from a “risk-free” instrument, such as US
Treasury bill. Note that even these instruments are not entirely risk-free
because of risks related to the exchange rate and rate of inflation.
❑ Cost of debt  A rate based on the cost of borrowed funds.
❑ WACC  A risk-adjusted rate that weighs a firm’s cost of equality and the
cost of debt by debt-to-equality ratio.
❑ Historical rate of return  A rate of return based on constant or current
performance of past investments
❑ Risk-adjusted rate of return  Any rate based on a constant or current
return adjusted for project risk. The capital asset pricing method (CAPM) is
often used to determine such a rate.

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Discount Rate

❑ Hurdle rate  Any specific minimum rate of return, regardless of how

derived
❑ Social rate of return  A rate used to determine the value of social
projects. This rate accounts for issues of equity and morally as well as
financial aspects of an investment
❑ Varying discount rate over time  A rate that reflects changes in risk
overtime. For example the risks can change once all capital has been
recovered and minimum rate of return achieved
❑ Varying discount rate by cash flow line item A rate that reflects the
difference in risk among various cash flow components. For example,
working capital and inventory charges have lower risks than capital charges
for new technologies.

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Estimating The Cost of Capital

Ref. Herwin Syahputra 7

Basic Cash Flow

Cash flow = Annual Cash Inflows – Annual Cash Outflows

Cash flow can be

 Retained to increas the value of the company
 Used to repay loan capital
 Returned to share holders as dividens

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Discounted Cash Flow
Application of time value of money in the cash flow

 Revenue : sales (ton) x unit price ($/ton)

 ( - ) operation cost
 ‘Gross Profit ‘after operation cost’
 ( - ) admin. cost
 EBITDA
 (-)D&A
 EBIT
 ( - ) Interest
 EBT
 ( - ) Tax (kalau rugi = 0)
 Net Income
 ( +) D & A
 Cash flow from Operation
 ( - )Capex/ CIP
 Cash flow ‘before Financing’
 ( + ) New debt
 ( - ) Debt repayment
 Cash flow
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Discounted Cash Flow (Simplified)
Year 0 Year 1 Year 2 Year 3 Year 4

Production 10,000 10,000 10,000 10,000

Unit Revenue 10 $10 $10 $10 $10
Revenue $100,000 $100,000 $100,000 $100,000

Operating Cost 1.915 $19,149 $19,149 $19,149 $19,149

Depreciation $50,000 $50,000 $50,000 $50,000

Taxable Income $30,851 $30,851 $30,851 $30,851

Tax Payable 25% $7,713 $7,713 $7,713 $7,713

After tax Profit $23,138 $23,138 $23,138 $23,138

Depreciation $50,000 $50,000 $50,000 $50,000

Capital ($200,000)

Net Cash Flow ($200,000) $73,138 $73,138 $73,138 $73,138

NPV @15% ROI $8,808

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THANK YOU