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1.

Introduction
Introduction:
The Kalimantan Paper Project which was introduced by Ibrahim Hanaffi, a prominent
Indonesion industrialist. He too this project on hand but the fact was that lac of financial
position creates a barrier to fulfill this project. !or that, on "pril #, #$%%, Ibrahim sent a re&uest
to three country's prominent ban (such as )eutsche Handelsban "* of +est *ermany, the
,etropolitan -an of .ew /or and the Kamaura -an of 0apan1 and arran2ed a discussion
session. The main aim of this discussion was within the end of 0une,each ban should be
prepared enou2h to offer indicati3e terms for main2 funds a3ailable to the project with loan
si2nin2. Ibrahim also 2ot support from the Indonesian ,inistry of !inance(,4!1 and the ban
of 5urabaya.
Product of the Project
Ibrahim Hanaffi wanted to produce hi2h &uality paper .
,ana2ement:
"nalysis the 6conomy:
6conomy is determined by country's *)P. 5o, the most important factor is population of
Indonesia.
Indonesia is the lar2est islamic populated country in the world. It has more than #7888 islands
and considered as a wide di3ersity country in terms of culture. ,any ethnic 2roups are seen
includin2 chinese, Indians,"rabs,,icronesians, ,alay and ,elanesiam. "mon2 those, ,alay is
the most dominent ethnic 2roup and only it introduced a officel lan2ua2e ,alay 9an2ua2e.
43er :;8 distinet nati3e spoe and use this lan2ua2e. Indonesia 2ot independence in #$<;. after
defeatin2 the )utch colonialists in #$<$, the economy of Indonesia was positi3e. -ut due to
5uarno ( The first president of Indonesia1,economy was 2oin2 downward. !or the first time,
economy faced hyperinflation,closed the economy to outside competition,ruined the
plantations,embared an ineffecti3e and costly military confrontation with ,alaysia, introduced
chronic bud2et deficits,nationli=ed the financial sector. !or those reason, Indonesia's business did
not raise as much as predict. !oeri2n in3estor did not enter into Indonesia because of hi2h
inflation and close economy. Paper industry did not 2row up due to ruin forest and plantation.
The business relationship between Indonesia and ,alaysia was decresin2. "ll these were liable
for o3er control of economy. -ut 5uharto 2i3e his best and brou2ht the economy under control.
In #$>8's, Indonesia's economy followed a path of de3elopment. It tried to protect domestic
economy ,basically an a2riculture industry,Indonesia mo3ed from bein2 a 2rain importer to self
sufficiency. Thwe *o3ertment introduced a transmi2ration pro2ram by which poor farmar were
2i3en 2o3ertment subsidies to resettle the sparsely populated re2ion of 6ast Kalomantan. This
pro2ram was e?pensi3e but saw it as an economic and cultural e?pendient. The Indonesian
currency , the rupiah can be con3ertible easily to the @.5 dollar. 5o it creates a bi2 opportinity to
e?pend business in @5 maret and @5 in3estor easily came here for runnin2 business. )ue to
increase foeri2n pri3ate capital to Indonesia, domestic sa3in2s ( *)P1 was increasin2. 6conomy
boost in #$>8's due to oil industry. Indonesia's economy trun into 2ood position due to e?port
commodities such as rubber, tropical wood, coffee and spices. -ud2et surpluses to soa up
liduidity that sa3e the country from serious inflation.
In #$%8's, the boom economy of Indonesia was bust in #$%8's while oil price steeply declined.
5udendly oil e?port decline from @5 A #; billion to @5 A ;8; billion by #$%B. )ue to increase
import ( Trade -alance )eteriorate1, debt was increasin2 and international mare was decreased
by hi2her debt ser3ice obli2ation.
2. Analysis of the economy
In the #$B8s, the economy deteriorated drastically as a result of political
instability, a youn2 and ine?perienced 2o3ernment, and economic nationalism,
which resulted in se3ere po3erty and hun2er. -y the time of 5oearno's downfall in
the midC#$B8s, the economy was in chaos with #,888D annual inflation, shrinin2
e?port re3enues, crumblin2 infrastructure, factories operatin2 at minimal capacity,
and ne2li2ible investment. !ollowin2 President 5oearno's downfall in the midC
#$B8s, the .ew 4rder administration brou2ht a degree of discipline to
economic policy that &uicly brou2ht inflation down, stabili=ed the currency,
rescheduled foreign debt, and attracted forei2n aid and in3estment. ( Berkeley
Mafa1. Indonesia was until recently 5outheast "sia's only member of 4P6E, and
the #$>8s oil price raises pro3ided an e?port re3enue windfall that contributed to
sustained hi2h economic 2rowth rates, a3era2in2 o3er >D from #$B% to #$%#.Hi2h
le3els of re2ulation and a dependence on declinin2 oil prices, 2rowth slowed to an
a3era2e of <.7D per annum between #$%# and #$%%. " ran2e of economic reforms
were introduced in the late #$%8s includin2 a mana2ed de3aluation of the rupiah to
impro3e e?port competiti3eness, and deCre2ulation of the financial sector, !orei2n
in3estment flowed into Indonesia, particularly into the rapidly de3elopin2 e?portC
oriented manufacturing sector, and from #$%$ to #$$>, the Indonesian
economy 2rew by an a3era2e of o3er >D.
*)P per capita 2rew ;<;D from #$>8 to #$%8 as a result of the sudden increase in
oil e?port re3enues from #$>7 to #$>$.
Suharto, the :nd president of Indonesia. @nder his New Order administration,
the country enjoyed the sustained economic de3elopment from #$>8s to #$$B.
Hi2h le3els of economic 2rowth from #$%>F#$$> mased a number of structural
weanesses in Indonesia's economy. *rowth came at a hi2h cost in terms of wea
and corrupt institutions, se3ere public indebtedness throu2h mismana2ement of
the financial sector, the rapid depletion of IndonesiaGs natural resources, and a
culture of fa3ors and corruption in the business elite.
[1!
Eorruption particularly
2ained momentum in the #$$8s, reachin2 to the hi2hest le3els of the political
hierarchy as Suharto became the most corrupt leader accordin2 to
"ransparency #nternational's corrupt leaders list."s a result, the le2al system
was 3ery wea, and there was no effecti3e way to enforce contracts, collect debts,
or sue for bankruptcy. -anin2 practices were 3ery unsophisticated, with
collateralCbased lendin2 the norm and widespread 3iolation of prudential
re2ulations, includin2 limits on connected lendin2. .onCtariff barriers, rentCseein2
by stateCowned enterprises, domestic subsidies, barriers to domestic trade and
e$port restrictions all created economic distortions.
Asian Financial Crisis
The %sian &inancial 'risis that be2an to affect Indonesia in midC#$$> became
an economic and political crisis. Indonesia's initial response was to float the rupiah,
raise ey domestic interest rates, and ti2hten fiscal policy. In 4ctober #$$>,
Indonesia and the #nternational Monetary &und (I,!1 reached a2reement on
an economic reform pro2ram aimed at macroeconomic stabili=ation and
elimination of some of the country's most dama2in2 economic policies, such as the
.ational Ear Pro2ram and the clove monopoly, both in3ol3in2 family members of
President 5oeharto. The rupiah remained wea, howe3er, and President 5oeharto
was forced to resi2n in ,ay #$$%. In "u2ust #$$%, Indonesia and the I,! a2reed
on an 6?tended !und !acility (6!!1 under President B() *abibie that included
si2nificant structural reform tar2ets. President %bdurrahman +ahid too
office in 4ctober #$$$, and Indonesia and the I,! si2ned another 6!! in 0anuary
:888. The new pro2ram also has a ran2e of economic, structural reform and
2o3ernance tar2ets.
The effects of the financial and economic crisis were se3ere. -y .o3ember #$$>,
rapid currency depreciation had seen public debt reach @5AB8 bn, imposin2 se3ere
strains on the 2o3ernment's bud2et. In #$$%, real *)P contracted by #7.>D. The
economy reached its low point in midC#$$$ and real *)P 2rowth for the year was
8.7D. Inflation reached >>D in #$$% but slowed to :D in #$$$.
The rupiah, which had been in the Hp :,B88I@5)# ran2e at the start of "u2ust
#$$> fell to ##,888I@5)# by 0anuary #$$%, with spot rates around #;,888 for brief
periods durin2 the first half of #$$%. It returned to %,888I@5)# ran2e at the end of
#$$% and has 2enerally traded in the Hp %,888F#8,888I@5)# ran2e e3er since,
with fluctuations that are relati3ely predictable and 2radual.
This is a chart of trend of 2ross domestic product of Indonesia at maret prices
[,-!
by the I,! with fi2ures in millions of rupiah.
/ear *)P
@5)
e?chan2e
(rupiah1
Inflation
inde?
(:88>J#881
.ominal Per
Eapita *)P
(as D of @5"1
PPP Per Eapita
*)P
(as D of @5"1
#$%8 B8,#<7.#$# B:> #8 ;.:; ;.$7
#$%; ##:,$B$.>$: #,### ## 7.<> ;.$%
#$$8 :77,8#7.:$8 #,%<7 #B 7.8# B.B7
#$$; ;8:,:<$.;;% :,:<$ :< <.## %.#<
:888 #,7%$,>B$.>88 %,7$B ;7 :.7: B.$:
:88; :,B>%,BB<.8$B $,>8; %7 7.#8 >.;#
:8#8 B,<::,$#%.:78 %,;;; #:# B.7% $.8;
!or purchasin2 power parity comparisons, the @5 dollar is e?chan2ed at 7,8$<.;>
rupiah only.
,ean wa2es were A:.7: per manhour in :88$.
#n.ation
In :8##, Indonesia's inflation rate was 7.>$ percent, below the 2o3ernmentCset
tar2et of ;.B; percent. It was the lowest inflation rate since #$$%.
K
International Economy for Pulp and Paper
The paper industry be2an a hasty e?pansion, durin2 the #$B8s, in response to rapid
increases in demand. Eonsumption in the two main subdi3isions of the industry,
bul paper 2rades (products used in publishin2, container and food industries1 and
3alueCadded 2rades (stationary and coated paper1, 2rew at ; percent annually.
)urin2 this time Eanadian interests supplied the @nited 5tates and 6uropean
Eommunity with pulp and newsprint 2rades they could not produce for themsel3esL
5candina3ian producers supplied the 6uropean EommunityL and any surplus
produce of pulp and paper products were e?ported to "sia, particularly 0apan
(+aitt #$$<a, #$$<b1.
In the #$>8s industry 2rowth shifted and slowed due to trade liberali=ation and a
fall in demand from ; percent to : percent per annum. This decade was
characterised by fallin2 tariff duties, maturin2 marets (for newspaper and writin2
paper 2rades1, and increasin2 paper prices. "s prices increased &uantityCdemanded
responded appropriately, as consumers conser3ed and substituted for paper by
usin2 new forms of media C particularly the electronic medium.
It was also durin2 the #$>8s that the industry made a transition from predominantly
family owned businesses to professionally mana2ed transnational corporations 3ia
mer2er or taeo3er ac&uisitions. "c&uisitions fulfilled two purposes,
internationalisation of production, and 3ertical or hori=ontal inte2ration. +aitt
obser3es that: Mformation of lar2e, di3ersified, pulp and paper con2lomerates was
the corporate strate2y around the worldM (#$$<b: #$1. The di3ersification occurrin2
within the industry referred to by +aitt was primarily 2eo2raphical, pro3idin2 a
secure access to 2rowth opportunities lacin2 in local maretsL and it was
predominantly .orth "merican and 5candina3ian companies which came to
dominate international acti3ity (+aitt #$$<a, #$$<b1.
!rom #$%7 onwards the industry once a2ain 2ained momentum as consumer and
corporate marets e?panded for hi2h &uality paper 2rades, especially in 2raphic
and coated paper (+aitt #$$<a1. Howe3er, as su22ested abo3e, the pulp and paper
industry is notorious for its 'boom and bust' cycles. M.o sooner has health been
restored to the industry than mana2ers and in3estors ha3e be2un to worry about the
timin2 and se3erity of their ne?t recessionM (The 6conomist #< 0anuary, #$$;: B>1.
Eontinually, durin2 the past thirty years, any sur2e in demand has, accordin2 to
Kersi (#$$;: #<<1, resulted in more in3estment in production capacity than is
re&uired to meet it. !irms ha3e attempted to a22ressi3ely increase their maret
share by carelessly e?pandin2 capacity, hopin2 to become price setters with the
aim of minimi=in2 priceCfalls when the cycle turned.
The boom which be2an in #$%7 went bust from #$%$ to #$$7, sendin2 the pulp and
paper industry into another se3ere recession. Pulp prices fell by more than half to a
fifty year low, industry profit le3els fell by nearly ;8 percent, and banruptcies and
di3estments became common (-usiness +ee $ 0anuary, #$$;: %7L 9effler #$$<L
The 6conomist #< 0anuary, #$$;L Kersi #$$;1. The recession was primarily a
result of the industry's pre3ious foray into strate2ies of di3ersification, e?pansion
and ac&uisitions which resulted in 2reatly increased capacity and o3ersupply.
,er2ers and ac&uisitions in the industry continued to sharply between #$$: and
#$$< (Paper N Paca2in2 "nalyst, "u2ust, #$$<1. ,any companies also be2an to
reor2ani=e by concentratin2 on niche marets and sellin2 or swappin2 assets. The
o3ersupply situation was further e?acerbated by a world recession (6dwards #$$;1.
"yres (#$$71 and Ehe2e (#$$<1 further su22est that the intensifyin2 burden of
o3ercapacity, o3ersupply, and declinin2 prices was due, in part, to a rapid increase
in new paper plants in "sia whilst demand for paper in +estern marets was
declinin2. In the @nited 5tates and 6urope, the demand for newsprint, which
accounts for #7 per cent of total paper production worldwide, declined as
consumers turned more to the electronic media for entertainment and news (Ehe2e
#$$<1. 9effler (#$$<1 liened the state of the pulp and paper industry in 6urope and
.orth "merica durin2 this period to the steel industry crisis on those continents
twenty years a2o.
Typically, #$$< re2istered a rapid turnaround with paper prices syrocetin2 and
profits risin2. The price of pulp climbed from a low of @5A7%8 per tonne at the end
of #$$7 to @5A>;8 per tonne in 0anuary #$$; and to @5A#888 by 0une, #$$;.
!urthermore, the price of Me3erythin2 from liner board C used for the outside of
corru2ated cardboard C to newsprint and fine paper were climbin2 tooM (The
6conomist #< 0anuary, #$$;: B>1. Pulp and paper factories were operatin2 at about
$8 per cent of capacity on a3era2e, and profits in #$$; increased by #78 percent
(-usiness +ee $ 0anuary, #$$;1.
Howe3er, 5tefan Kay, chairman of the Paper !ederation of *reat -ritain,
interposed a more 2loomy pro2nosis: MI now belie3e that the headlon2 and almost
unprecedented increase in world maret pulp prices is layin2 the basis not only for
the ne?t recession but perhaps for the lon2Cterm decline of the paper industryM
(Kay #$$;1. Kay went on to identify three lon2Cterm conse&uences: first, nonC
inte2rated mills will continue to close as has been the case in the @nited 5tates and
6urope where a number of less specialised mills ha3e already closed or announced
closure, citin2 an inability to pass on pulp costs as a major factorL second, more
printers will close as technolo2ical inno3ation and increasin2 capacities lea3e less
roomL and third: M2rotes&ue profits from pulp will e?cite new in3estment (and ic
off the ne?t collapse1M.
The ad3ice firms are now recei3in2 from industry journals is to in3est in
automation technolo2y and informationCmana2ement systems, and to chan2e the
'justCinCtime' production mode. +hether this will e?acerbate or alle3iate cyclical
turns in the industry remains to be seen.
3. Analysis of the industry
P65T69 "nalysis
The Political and legal factor-
*o3ernment has attempted to enocoura2e domestics and forei2n in3estors.
*o3ernment 2i3es different type of facility lieC simplification of permision
procedure,trade re2ulations,banin2 facilities,allocation of land fo plantation and
reforestation policy.2o3ernment trad re2ulation policy on import tarrif for pulp and
paper production has been continuously reduced.from:; to 78D in #$$<. *o3ernment
also pro3ide ta? e?emption for betterment of pulp and paper Industry.
He2ulation for forei2n capital in3estment
The 2o3ernment has paid much attention to forei2n capital in3estment(P,"1, as
reflected in followin2 pro3isionsC
P," companies that obtained 2o3ernmentGs appro3als under law no. #I#$B>
are 2i3en a 78 yearsG period of in3estment feom the date of establishment of the
le2al business.
Pma companies that ha3e commited in3estment accordin2 to the 2o3ernmentGs
appro3al can apply for a permit to e?pand
Pma companies are re&uired to be in the form of joint 3entures and a
minimum of :8D of the companies shares is to be national capital at the time
of in3estment and it is to increase to ;# percent within #; years from the
commitment of the commercial production.
Pma companies are entitled to the same facilites as pmdn companies if the
2o3ernment owns ;#D of the shares, or national pri3ate companies , on
condition that :8D of the total shares are sold throu2h the stoc e?chan2e as
maret as shares on behalf of public share.
The pulp and paper industry is now attracted P," in3estors , as indonesianGs
conditions are considered competiti3e, particularly for e?port purpose.
Facilities for investment
!inancial facilities pro3ided to P,"IP,). companies introduced in law
no. 7 of 193 regarding value added ta! for 2oods and ser3ices and sales
ta? for lu?urious 2oods and law no.#7 of #$%; concernin2 5tamp )uties for
!iscal !acilities are as follows:
a1 Heduction of I e?emption from import duty for machines and
spare parts, e?cept for specified types already produced
locally.
b1 6?emption from import dutyfor raw materialsI supportin2
materials for a two years period of production.
c1 6?emption from Ehan2 of .ame )uty for the first ship
re2istration act applied in Indonesia.
d1 6?emption from income ta? for importers of capital 2oods and
raw materials for a one year perid for new companies on
condition that the company is not under obli2ation to pay
income ta?.
In the #$B8s, the economy deteriorated drastically as a result of political instability, a youn2 and
ine?perienced 2o3ernment, and economic nationalism, which resulted in se3ere po3erty and
hun2er. -y the time of 5oearno's downfall in the midC#$B8s, the economy was in chaos with
#,888D annual inflation, shrinin2 e?port re3enues, crumblin2 infrastructure, factories operatin2
at minimal capacity, and ne2li2ible investment. !ollowin2 President 5oearno's downfall in
the midC#$B8s, the .ew 4rder administration brou2ht a degree of discipline to economic
policy that &uicly brou2ht inflation down, stabili=ed the currency, rescheduled foreign debt,
and attracted forei2n aid and in3estment. ( Berkeley Mafa1. Indonesia was until recently
5outheast "sia's only member of 4P6E, and the #$>8s oil price raises pro3ided an e?port
re3enue windfall that contributed to sustained hi2h economic 2rowth rates, a3era2in2 o3er >D
from #$B% to #$%#.Hi2h le3els of re2ulation and a dependence on declinin2 oil prices, 2rowth
slowed to an a3era2e of <.7D per annum between #$%# and #$%%. " ran2e of economic reforms
were introduced in the late #$%8s includin2 a mana2ed de3aluation of the rupiah to impro3e
e?port competiti3eness, and deCre2ulation of the financial sector, !orei2n in3estment flowed into
Indonesia, particularly into the rapidly de3elopin2 e?portCoriented manufacturing sector,
and from #$%$ to #$$>, the Indonesian economy 2rew by an a3era2e of o3er >D.
*)P per capita 2rew ;<;D from #$>8 to #$%8 as a result of the sudden increase in oil e?port
re3enues from #$>7 to #$>$.
Suharto, the :nd president of Indonesia. @nder his New Order administration, the country
enjoyed the sustained economic de3elopment from #$>8s to #$$B.
Hi2h le3els of economic 2rowth from #$%>F#$$> mased a number of structural weanesses in
Indonesia's economy. *rowth came at a hi2h cost in terms of wea and corrupt institutions,
se3ere public indebtedness throu2h mismana2ement of the financial sector, the rapid depletion of
IndonesiaGs natural resources, and a culture of fa3ors and corruption in the business elite.
[1!
Eorruption particularly 2ained momentum in the #$$8s, reachin2 to the hi2hest le3els of the
political hierarchy as Suharto became the most corrupt leader accordin2 to "ransparency
#nternational's corrupt leaders list."s a result, the le2al system was 3ery wea, and there was
no effecti3e way to enforce contracts, collect debts, or sue for bankruptcy. -anin2 practices
were 3ery unsophisticated, with collateralCbased lendin2 the norm and widespread 3iolation of
prudential re2ulations, includin2 limits on connected lendin2. .onCtariff barriers, rentCseein2 by
stateCowned enterprises, domestic subsidies, barriers to domestic trade and e$port
restrictions all created economic distortions.
"#$IA% FA$T#&" AFF'$TI() T*' P+%P A(, PAP'& I(,+"T&-
9ined to the economic factors abo3e social chan2es ha3e si2nificantly impacted thepulp and
paper industry in relation to chan2in2 demo2raphics in terms of the customers it tar2ets. "s such
then chan2es in customer's needs and preferences for &uality paper products and chan2in2
preference towards the paper rather than fiber or plastic has increased the pace of the demand in
terms of meetin2 these needs. Increased 2lobali=ation ar2uably has led to customers demandin2
faster responses to their needs creatin2 much more competiti3e business fields attemptin2 to
satisfy these desires. The industry is not only about technolo2y but about pictures illustratin2 the
industry attempt to relate to the lifestyles of consumers. This is because customers ha3e become
more en3ironmental sensiti3e as well as techni&ue and &uality orientated as a result of hi2her
educational le3els and income le3els creatin2 much more discernin2 customers in relation to
these.
The sociolo2ical conte?t of human resource has been a major influence. !le?ibility in terms of
labor in Indonesian pulp and paper industry has been mainly achie3ed by enlar2in2 the scope of
tass and a rela?ation of or2ani=ational boundaries within the business industry. Paper
manufacturers are producin2 white paper and supply it at a concessional rate to the educational
sector and to the 2o3ernmental departments as well as per re2ulation 2i3en by the 2o3ernment.
T'$*(#%#)I$A% FA$T#&" AFF'$TI() T*' P+%P A(, PAP'&
I(,+"T&-
Eurrently, 2o3ernmental as well as sector initiati3es focus on o3ercomin2 the acute raw material
constraints, implementin2 and adoptin2 better technolo2ies, increasin2 production, producti3ity
and efficiency, e?pandin2 to economies of scale and decreasin2 en3ironmental effluents. Oarious
new technolo2ies are enterin2 the Indonesian maret that support these mo3ements.
Presently, lar2e pulp and paper mills are more efficient, usin2 better and more modern
technolo2ies and appropriatin2 economies of scale. "dditionally, they pro3ide chemical reco3ery
facilities which reduce both emissions and e?ternal ener2y re&uirements. Howe3er, the lar2e
paper mills also face se3ere basic problems such as hi2h production costs, raw material
constraints and low producti3ity. 43erall performance has been best in medium si=e firms with
re2ards to a3era2e profitability
Environmental factor:

G eographical location:
#ts geographic environment is one of the most comple$es and varied in the
world( By one count/ it has situated in South01astern %sia between the #ndian
Ocean and the2acifc Ocean( #t has total 1/345/63 s7 km area in that land is
1/811/63 s7 km and water is3,/444 s7 km( Basically it is hot and humid
country( %t least 3 distinct languages and wellover 1/144 di9erent dialects
are spoken( "he nation encompasses some 1,/: islands; thelandscape
ranges from rain forests and steaming mangrove swamps to arid plains and
snowcapped mountains( #ndonesia is very attractive industry for pulp and
paper productions for it<s natural resourses with low cost(=eographically
plant is matured at least : years where/North %merica and 1urope re7uire
twentyfve to ffty years to reach maturity(

Time zone:
#ndonesia is time >one is ?"'@: mean seven hours ahead of =M" and 1
hoursahead of ?(S( 2acifc Standard "ime(

Natural or environmental disaster:
Aue to its geographic location/ several times #ndonesia has faced many
natural disasters(
#n the same way/ due to its mountainous interior regions of
Balimantan/Sulawesi/ and Sumatra/ country has faced deforestation/ soil
erosion and massive forest fres( #n138,/ about , million hectares of prime
tropical forest worth at least ?SC14 billion weredestroyed in a fre in
Balimantan "imur 2rovince( "he disastrous scale of this fre was
made possible by the piles of dead wood left behind by the timber industry(
1ven discounting the calamitous e9ects of the fre/ in the mid01384s
#ndonesiaDs deforestation rate was the highest inSoutheast %sia/ at :44/444
hectares per year and possibly as much as 1 million hectares per year(
PorterGs ; !actors
2OE"1ES 6 &%'"OES0
Rivel among existing frm
"here is large number of players in pulp and paper industry/ which increases
rivalry among them("here is an intense rivalry as pulp and paper have high
storage cost( "here is a higher level of rivalry as there is a low level of
product di9erentiation( #ndustry growth rate is high and demand of the
product is also high( So continuoussly new frm will come ( in indonesia cost
of wood and raw materials is lower than other country and government is not
so strick to control the environment( the more frm the more deforestation
but government concern about the economic growth(
argaining po!er of suppliers
" producin2 industry re&uires raw materials C labor, components, and other supplies.
Thisre&uirement leads to buyerCsupplier relationships between the industry and the firms
that pro3ide it the raw materials used to create products.
Indonesia has the world's
second-largest tropical rain forest, after Brazil, wood prices are
half those in Taiwan.Most of the Pulp and paper industry are
vertically integrated . Industries raw materials lie rice straw,
!am!oo, !agasse ,pulp, waste paper and chemicals etc are
availa!le in Indonesia so this industry is not dominated !y
supplier. "ven #uel costs are low !ecause Indonesia is a ma$or oil
producer. wage costs, which account for %% percent of the total
cost of production, are a!out one third of those in Thailand and
Malaysia and one tenth of Taiwan. They sometimes involves as
suppliers !ecause this industry is vertically integrated.
&overnment also give the opportunity to use the forest and land
to collect and produce plant . without plant this industry is not
possi!le to go ahead !ecause it is the main factor to produce pulp
and paper. 'o most of the investor control the supplier .
argaining po!er of "u#ers
"he power of buyers is the impact that customers have on a producing
industry( #n paper industry/ buyers are powerful as they purchase a
signifcant proportion of output/ andthey possess a credible backward
integration threat/ they are weak as they are fragmented(
Entr# and Exit "arriers
1ntry barriers
=overnment policy
1conomies of scale
'apital re7uirement
Special access to distribution
Switching cost
1$pected retaliation from present players
Farge investments in technology/ not capable of alternate uses
1$it barriers
1asy to e$it as e$it cost is low and it is an independent business( if frm has
high debt / it has to repay on this debt so huge cost incure to e$it(
Threat from su"stitutes
#n 2orterDs model/ substitute products refer to products in other industries(
=B pendrive can hold the same data where tonnes of paper can hold(
Substitutes for paper is pendrives/ 2's/ etc and in case of packaging/
glasses/ aluminum foil/ plastics/ etc(( "hreatarises from the price change of
substitute product and also their availability which gives more choice for the
customers
.. Analysis of the $om/any
Hatio "nalysis
)u Pont
5+4T "nalysis
The Kalimantan Paper Project which was introduced by Ibrahim Hanaffi, a prominent
Indonesian industrialist. He too this project on hand but the fact was that lac of financial
position creates a barrier to fulfil this project. Ibrahim Hanaffi wanted to produce hi2h &uality
paper.
63ery corporation has some internal and e?ternal factor under which some factor encoura2e
them and some factor discoura2e them. 5o, The Kalimantan Paper Project has some stren2ths
and weaness which indicate internal factor of The Kalimantan Paper Project and also has
some opportunities and threats which indicate e?ternal factor of The Kalimantan Paper Project.
Internal factors0
5tren2th:
The site offered not only suitable terrain for clearCcuttin2 and subse&uent plantin2 of the
forest plantation, but also offered e?ploitable 2rowin2 timber.
.earby settlements of 0a3anese mi2rants promised a reliable source of production and
forestry labor.
The Indonesian 2o3ernment had shifted its policies from import substitution to e?port
2rowth, and had implemented a ban on e?port of hardwood lo2s.
The 6)E of Eanada had committed in a letter of intent to pro3ide up to A ##; million in
term financin2 at a fi?ed annual rate of interest of % D directly to the importer in return
for receipt of a 2uarantee from a prime international ban or the ,4! and 3arious
undisclosed fees to be recei3ed from the e?porter. The remainin2 A#:; million of e?port
credit e&uipment financin2 could be secured on terms not si2nificantly different from
those indicated by Hermes and the 6)E.
1ea2ness0
The in3estors ar2ued that they were tain2 a hi2h ris in in3estin2 in a facility usin2
plantation technolo2y untested in Indonesia.
They had to repayment their loan amount in ei2ht semiannual repayments startin2 in 0une
#$$7 and endin2 )ecember #$$B. Hupiah principal outstandin2 at the end of construction
period is left as worin2 capital facility throu2h life of project.
'!ternal factor0
#//ortunities0
The in3estors were eli2ible for a fi3eCyear corporate ta? holiday followin2
commissionin2.
The -an of 5urabaya and other local baners would pro3ide short term rupiah funds for
worin2 capital of up to AB8 million.
The in3estors remained hi2hly fle?ible with re2ard to the capital structure of the project.
They would consider any serious financin2 alternati3e.

Threats0
"ccordin2 to the estimation, amon2 the top ;8 countries in institutional in3estorGs country ris
ratin2s in #$$%L the Indonesia ratin2 is <: number rans in both #$%% N #$%>. The in3estors will
be unsecured to in3est the hi2hly ris country project.
&is2 Analysis0
His is defined as the 3ariation from the e?pected return. His is measured by the
standard de3iation of return. -usiness ris and financial ris is total ris of a firm.
Two types of ris in a firm,
-usiness His
!inancial His
If the firm does not ha3e debt:
Business risk:
-usiness ris is the 3ariation of return for the main operation of the firm. The ris
associated with projections of a firmGs future return on asset (H4", H46 if the
firm uses no debt.
3ussiness &is2
"ales 4"ales-Average562
#$%$ #8.B 7%:7#.$%8$
$8 ::.; 77>#$.$>B$
$# :; 7:%8%.8>B$
$: #7$.: <<>$.B:<$
$7 :>;.# <>;B.%B8$
$< 78: $#$#.8;B$
$; 78;.> $$#<.#%<$
$B 7#> #::$:.#;B$
$> 7:;.$ #<7<<.%;:$
$% 77%.7 #><B%.$8%$
Total :8B#.7 #>>:8>.B%#
"3era2e :8B.#7 #>>:8.>B%#
5) #77.##$7>;<
EO 8.B<;%878#<
Projected -ussiness His
.ew 5ales (5alesC"3era2e1P:
2777 #%.%7<8<%: #:8B$%.B;7;
2771 7$.$>>$7:; #;$%.:7;8%>
2772 <<.<#$$:; #$>7.#:$>7>
2773 :<>.778#<:< B##>:.#$$7<
277. <%%.>$B%;<> :7%$::.7B;:
2778 ;7B.;$:B$< :%>$7#.>#$7
2779 ;<7.#BB%<:$ :$;878.:#$:
2777 ;B7.:<<B<$ 7#>:<<.;7<B
277 ;>$.8;%#<:7 77;78%.77::
2779 B8#.8$8<:;# 7B#78$.B$$#
Total 7BB:.;##B;B :8:##%$.8%>
"3era2e 7BB.:;##B;B :8:##%.$8%>
5) <<$.;%
EO #.:7
Aegree of Operating
Feverage
1383 34 31 3- 3, 35 36
Sales 14(4 --(64 -6(44 1,3(-4 -:6(14 ,4-(44 ,46(:4 ,1:(44
G 'hanges in sales
1(1--
5-
4(1111
11 5(68
4(3:-
3,
4(43::
8,
4(41--
6-
4(4,3
1B#" 6(8 15(6 1(- :6(- 185(3 -45(3 -4(6 -1,(
G 'hanges in 1B#" 1(6
4(11:-
51
,(513
:6
1(568:
::
4(1481
:
4(44:8
43
4(4,5,
AOF
1(,,1
,5
1(4661
:-
4(:3:-
8
1(5351
33
1(141
35
4(,:,
68
4(3,41
-usiness ris depends on:
Demand variabilityH #n Balimantan paper proIect/ #ndonesia<s
economy faced recession when the price of oil steeply declined in
1384( #t was o9set by aid fnancing of proIect and raising debt in
international fnancing market/ which brought with it higher debt
service obligation( %s considered the e7uipment demand variation
is high with the economic condition/ the business risk is also high
for the proIect(
Sales price variabilityH "he proIect components are hardwood
log sales/ plywood production and pulp J paper production( "he
components sales prices variation is too high in 1383 to 1338
throughout the proIect( "he sales price direction is increasing but
business risk is high for changes the sales prices(
Input cost variabilityH the Balimantan paper proIect raw
material is timber cost/ plywood materials and paper materials
which prices also variation throughout the proIect( "he business
risk is also high(
Ability to adjust output prices for changes in input costH
"he proIect adIusts the output prices for changes in input out
following year( So/ business risk is comparatively low(
Ability to develop new products in a timely cost efective
manner
Foreign risk exposure
perating leverageH "he e$tent to which cost are f$ed( #n
Balimantan paper proIect/ the f$ed cost percentage is almost
84G or above( Aepending on f$ed cost in operating the proIect
increases the business risk of the proIect(
Financial Risk
!inancial ris is the additional ris placed on the common stocholders for the use
of borrowed capital. The portion of stocholderGs ris, o3er N abo3e basic business
ris, that results from the manner in which the firm is financed.

.et
Income
#$%$ ;.% #<7B#.B:;B
$8 #<.; :#8.:;
$# #B.: :B:.<<
$: >;.: ;B;;.8<
$7 #<<.< #$<7;.>7$%%
$< #>7.$ :<$%$.$7#B<
$; #%<.$ :>>B8.BB88#
$B :8#.; $8<B.::;>$%
$> :#B.# #8B8.7<B8B%
$% ::7.$ :B:>.;<>:8;
T4T"9 #:;B.< #8;<8$.%8B:
"O* #:;.B< #8;<8.$%8B:
5) #8:.BB$:>>$
EO 8.%#>#>87##
Projected Income
5tatement
:888 <.$%>%>>;% 7#$%B.>>
:88# #;.%#>$;$: :;8.:#
:88: #%.:%<B$<; 77<.77
:887 #8B.7%%7;# ##7#%.<%
:88< :<%.BB:$;; B#%77.:>
:88; :>;.#;$B8B >;>#:.%#
:88B :>>.<:>8:$ >B$B;.>B
:88> :%%.#<:;7: %78:B.#:
:88% :$B.##88# %>B%#.#<
:88$ 78>.7%:7#> $<<%7.%$
Total #%7%.7B777 ;:7;$:.>>
"3era2e #%7.%7B777 ;:7;$.:%
5) ::%.%:#<$;
EO #.:<<>8::7B
Aegree of &inancial
Feverage
1383 34 31 3- 3, 35 36
Sales 14(4 --(64 -6(44 1,3(- -:6(14 ,4-(44 ,46(:4 ,1:(44
4
G 'hanges in sales
1(1--
5-
4(1111
11 5(68
4(3:-
3,
4(43::
8,
4(41--
6-
4(4,3
1B#" 6(8 15(6 1(- :6(- 185(3 -45(3 -4(6 -1,(
1B#"0#nterest 6(8 15(6 1(- :6(- 155(5 1:,(3 185(3 -41(6
A&F 1 1 1 1
1(-845
:1
1(1:8-
,
1(118
-
1(444
If Kalimantan paper project taes lon2 term debt then financial ris will arise. "
debt ratio indicates that a company has more assets, meanwhile, a debt ratio of
more assets than debt which creates asset a3ailability ris. The Kalimantan paper
project debt ratio can help in3estors determine a companyGs le3el of ris which is
financial ris.
The projectGs main sources of financin2 were to be e?port credit loans (@5 A 7B8
million1 which interest rates are assumed to be %D, a syndicated 6urodollar loan
(@5A #88 million1 at $D interest rates and with a re3ol3in2 rupiah debt on #:D
interest rates. The term loan is repaid in ei2ht semiCannual repayments startin2 in
0une #$$7 and endin2 in )ecember #$$B. "s the interest is capitali=ed durin2
construction.
Total )ebt (><;C#;81 J;$; @5A
Total 6&uity J#;8 @5A
1. Pro:lem "tatement
Immediate problem
In Kalimantan paper project each participants ha3e somethin2 to 2ain from the
project, as lon2 as it was structured to allow those 2ains, but each could achie3e the
desired project structure only with the cooperation of other decision maers. If all
participant thins about their own return then this project will not be attracti3e to
e3eryone so e3ery decision maer had not only to accurately e3aluate its own
project risCreturn tradeoffs, but also those of all project staeholders.
%i;uidity ratios
$urrent &atio
The current ratio is a financial ratio that measures whether or not a firm has enou2h resources
to pay its debts o3er the ne?t #: months. It compares a firm's current assets to its current
liabilities. It is e?pressed as follows:
The current ratio is an indication of a firm's maret li&uidity and ability to meet creditor's
demands. "cceptable current ratios 3ary from industry to industry. If a company's current ratio is
in this ran2e, then it is 2enerally considered to ha3e 2ood shortCterm financial stren2th. If current
liabilities e?ceed current assets (the current ratio is below #1, then the company may ha3e
problems meetin2 its shortCterm obli2ations. If the current ratio is too hi2h, then the company
may not be efficiently usin2 its current assets or its shortCterm financin2 facilities. This may also
indicate problems in worin2 capital mana2ement.
Here we can see the Eurrent ratio was hi2her in the earlier periods than the later periods. +e can
say that this company had 2ood shortCterm financial stren2th as its current ratio was hi2her but as
it is low in the later periods the li&uidity position is 2oin2 to worse position. "s they are repayin2
their loans their current asset is decreasin2 and so the current ratio is also decreasin2.
.
<uic2 &atioIn
The Acid-test or ;uic2 ratio or li;uid ratio measures the ability of a company to use its near
cash or &uic assets to e?tin2uish or retire its current liabilities immediately. Quic assets
include those current assets that presumably can be &uicly con3erted to cash at close to their
boo 3alues. " company with a Quic Hatio of less than # can not currently pay bac its current
liabilities.
.ote that In3entory is e?cluded from the sum of assets financially. Hatio are financially 3iable
option for business entities but the li&uidity of the liabilities show financial stability. *enerally,
the acid test ratio should be #:# or hi2her, howe3er this 3aries widely by industry. In 2eneral, the
hi2her the ratio, the 2reater the company's li&uidity (i.e., the better able to meet current
obli2ations usin2 li&uid assets1. +e will compare this ratio with our industry a3era2e
Here we can see the &uic ratio was hi2her in the earlier periods than the later periods. +e can
say that this company had 2ood shortCterm financial stren2th as its &uic ratio was hi2her but as
it is low in the later periods the li&uidity position is 2oin2 to worse position. "s they are repayin2
their loans their current asset is decreasin2 and so the &uic ratio is also decreasin2.
Asset =anagement &atios
Inventory Turnover
In3entory turno3er is the ratio of cost of 2oods sold to a3era2e in3entory. It is an acti3ity I
efficiency ratio and it measures how many times per period, a business sells and replaces its
in3entory a2ain.
-ased on our calculation we found that in3entory turno3er ratio was hi2her in the earlier periods.
-ut in later periods it becomes lower. This ratio su22est that this company is holdin2 e?cess
stocs of in3entory and e?cess stocs are, of course, unproducti3e and represent an in3estment
with a low or =ero rate of return. 5o the company also hold e?cess in3entory and they had not
enou2h li&uid asset.
,ays "ales #utstanding
" measure of the a3era2e number of days that a company taes to collect re3enue after a sale has
been made. " low )54 number means that it taes a company fewer days to collect its accounts
recei3able. " hi2h )54 number shows that a company is sellin2 its product to customers credit
and tain2 lon2er to collect money.
)ays sales outstandin2 is calculated as:
Due to the high importance of cash in running a business, it is in a company's best interest to collect
outstanding receivables as quickly as possible. By quickly turning sales into cash, a company has the
chance to put the cash to use again - ideally, to reinvest and make more sales. The DS can be used
to determine !hether a company is trying to disguise !eak sales, or is generally being ineffective at
bringing money in.
-ased on our calculation we found that )ays 5ales 4utstandin2 ratio was hi2h in the earlier
periods. -ut in #$$: it becomes too lower but a2ain it 2rew from #$$7. This ratio su22est that it
is holdin2 recei3ables and it is, of course, unproducti3e and it may cause hi2her bad debt.
TAT#
The total asset turno3er ratio measures the ability of a company to use its assets to efficiently
2enerate sales. This ratio considers all assets, current and fi?ed. Those assets include fi?ed assets,
lie plant and e&uipment, as well as in3entory, accounts recei3able, as well as any other current
assets.
The calculation for the total asset turnover ratio is:
(et "ales>Total Assets
The lower the total asset turno3er ratio ,as compared to historical data for the firm data, the more
slu22ish the firm's sales. This may indicate a problem with one or more of the asset cate2ories
composin2 total assets C in3entory, recei3ables, or fi?ed assets.
"he total asset turnover ratios indicate that over the historical years/ the
companyDs eKciency had decreased/ but according to their proIection it is
indicating that the companyDs eKciency was increasing from 1331 to 133
which may be because of their very high growth rate of proIection( But from
1335 to 1338 it is decreasing(
FAT#
" financial ratio of net sales to fi?ed assets. The fi?edCasset turno3er ratio measures a company's
ability to 2enerate net sales from fi?edCasset in3estments C specifically property, plant and
e&uipment (PPN61 C net of depreciation. " hi2her fi?edCasset turno3er ratio shows that the
company has been more effecti3e in usin2 the in3estment in fi?ed assets to 2enerate re3enues.
The fi?edCasset turno3er ratio is calculated as:
The fi?edCasset turno3er ratio was lower in the earlier periods as company's ability to 2enerate
net sales from fi?edCasset in3estments was lower. -ut in later periods is become hi2her and a
hi2her fi?edCasset turno3er ratio shows that the company has been more effecti3e in usin2 the
in3estment in fi?ed assets to 2enerate re3enues.
,e:t =anagement &atios
,e:t &atio
" ratio that indicates what proportion of debt a company has relati3e to its assets. The measure
2i3es an idea to the le3era2e of the company alon2 with the potential riss the company faces in
terms of its debtCload.
" debt ratio of 2reater than # indicates that a company has more debt than assets, meanwhile, a
debt ratio of less than # indicates that a company has more assets than debt. @sed in conjunction
with other measures of financial health, the debt ratio can help in3estors determine a company's
le3el of ris.
!rom #$%$ to #$$# the debt ratio was lower for this firm but it 2rew in #$$: as it too more debt
then a2ai it came down. -ut still this is a hi2h ratio which indicates hi2her debt and for this
reason in3estor will not be attracted as there is too much ris in this project,
TI'
" metric used to measure a company's ability to meet its debt obli2ations. It is calculated by
tain2 a company's earnin2s before interest and ta?es (6-IT1 and di3idin2 it by the total interest
payable on bonds and other contractual debt. It is usually &uoted as a ratio and indicates how
many times a company can co3er its interest char2es on a preta? basis. !ailin2 to meet these
obli2ations could force a company into banruptcy.
6nsurin2 interest payments to debt holders and pre3entin2 banruptcy depends mainly on a
company's ability to sustain earnin2s. Howe3er, a hi2h ratio can indicate that a company has an
undesirable lac of debt or is payin2 down too much debt with earnin2s that could be used for
other projects. The rationale is that a company would yield 2reater returns by in3estin2 its
earnin2s into other projects and borrowin2 at a lower cost of capital than what it is currently
payin2 to meet its debt obli2ations.
!rom #$%$ to #$$< the time interest earned ratio was lower for this firm but it 2rew in #$$; as it
too more debt. -ut this is a more hi2her from #$%> to #$%$ which indicates this company is in
better position and it can easily meet its obli2ation with its earnin2s.
'3IT,A
" financial metric used to assess a company's profitability by comparing its revenue !ith earnings.
#ore specifically, since $B%TD" is derived from revenue, this metric !ould indicate the percentage of a
company is remaining after operating e&penses.
Sometimes referred to as '$B%TD" margin'.
(alculated
Profita:ility &atios
3'P
The basic earnin2 power ratio (or -6P ratio1 compares earnin2s apart from the influence of ta?es
or financial le3era2e, to the assets of the company. This interacti3e tutorial e?plains the concept
by walin2 you throu2h the calculations, includin2 where to find the numbers on the financial
statements.
P=
" ratio of profitability calculated as net income di3ided by re3enues, or net profits di3ided by
sales. It measures how much out of e3ery dollar of sales a company actually eeps in earnin2s.
Profit mar2in is 3ery useful when comparin2 companies in similar industries. " hi2her profit
mar2in indicates a more profitable company that has better control o3er its costs compared to its
competitors. Profit mar2in is displayed as a percenta2eL a :8RD profit mar2in, for e?ample,
means the company has a net income of A8.:8 for each dollar of sales.
"lso nown as .et Profit ,ar2in.
9ooin2 at the earnin2s of a company often doesn't tell the entire story. Increased earnin2s are
2ood, but an increase does not mean that the profit mar2in of a company is impro3in2. !or
instance, if a company has costs that ha3e increased at a 2reater rate than sales, it leads to a lower
profit mar2in. This is an indication that costs need to be under better control.

&#A
"n indicator of how profitable a company is relati3e to its total assets. H4" 2i3es an idea as to
how efficient mana2ement is at usin2 its assets to 2enerate earnin2s. Ealculated by di3idin2 a
company's annual earnin2s by its total assets, H4" is displayed as a percenta2e. 5ometimes this
is referred to as Mreturn on in3estmentM.
The formula for return on assets is:

H4" tells you what earnin2s were 2enerated from in3ested capital (assets1. H4" for public
companies can 3ary substantially and will be hi2hly dependent on the industry. This is why when
usin2 H4" as a comparati3e measure, it is best to compare it a2ainst a company's pre3ious H4"
numbers or the H4" of a similar company.
The assets of the company are comprised of both debt and e&uity. -oth of these types of
financin2 are used to fund the operations of the company. The H4" fi2ure 2i3es in3estors an
idea of how effecti3ely the company is con3ertin2 the money it has to in3est into net income.
The hi2her the H4" number, the better, because the company is earnin2 more money on less
in3estment. !or e?ample, if one company has a net income of A# million and total assets of A;
million, its H4" is :8DL howe3er, if another company earns the same amount but has total assets
of A#8 million, it has an H4" of #8D. -ased on this e?ample, the first company is better at
con3ertin2 its in3estment into profit. +hen you really thin about it, mana2ement's most
important job is to mae wise choices in allocatin2 its resources. "nybody can mae a profit by
throwin2 a ton of money at a problem, but 3ery few mana2ers e?cel at main2 lar2e profits with
little in3estment.
&#'
The amount of net income returned as a percenta2e of shareholders e&uity. Heturn on
e&uity measures a corporation's profitability by re3ealin2 how much profit a company
2enerates with the money shareholders ha3e in3ested.
H46 is e?pressed as a percenta2e and calculated as:
&eturn on ';uity ? (et Income>"hareholder@s ';uity
.et income is for the full fiscal year (before di3idends paid to common stoc holders but after
di3idends to preferred stoc.1 5hareholder's e&uity does not include preferred shares.
"lso nown as Mreturn on net worthM (H4.+1.
,+ P#(T
" method of performance measurement that was started by the )uPont Eorporation in the #$:8s.
+ith this method, assets are measured at their 2ross boo 3alue rather than at net boo 3alue in
order to produce a hi2her return on e&uity (H461. It is also nown as M)uPont identityM.
)uPont analysis tells us that H46 is affected by three thin2s:
C4peratin2 efficiency, which is measured by profit mar2in
C"sset use efficiency, which is measured by total asset turno3er
C!inancial le3era2e, which is measured by the e&uity multiplier
&#' ? Profit =argin 4Profit>"ales5 A Total Asset Turnover 4"ales>Assets5 A ';uity
=ulti/lier 4Assets>';uity5
It is belie3ed that measurin2 assets at 2ross boo 3alue remo3es the incenti3e to a3oid in3estin2
in new assets. .ew asset a3oidance can occur as financial accountin2 depreciation methods
artificially produce lower H46s in the initial years that an asset is placed into ser3ice. If H46 is
unsatisfactory, the )uPont analysis helps locate the part of the business that is underperformin2.
#ear $% TAT&
E'uit#
%ultiplier R&E
1383 4(65:1: 4(4655: ,(831 4(11
34 4(55555 4(48415- 6(16 4(-3
31 4(58 4(11,:5 5(,3 4(,-5
3- 4(654-, 4(,3483 LA#MN4O LA#MN4O
3, 4(6-53 4(8841:3 6(36,,,, -(:645:
35 4(6:68-8 4(861566 (5,5-,1 ,(16553
36 4(45851 4(:35,:, (585 ,(1355:1
3 4(,65: 4(:6-648 (3,1,36 ,(,16531
3: 4(,48: 4(:118: :(1:51- ,(,85
38 4(18,3 4(:85:, :(55166 ,(,5166,
$cc
" metric that e?presses the len2th of time, in days, that it taes for a company to
con3ert resource inputs into cash flows. The cash con3ersion cycle attempts to measure the
amount of time each net input dollar is tied up in the production and sales process before it is
con3erted into cash throu2h sales to customers. This metric loos at the amount of time needed
to sell in3entory, the amount of time needed to collect recei3ables and the len2th of time the
company is afforded to pay its bills without incurrin2 penalties.
"lso nown as Mcash cycle.M

Ealculated as:
+here:
)I4 represents days in3entory outstandin2
)54 represents days sales outstandin2
)P4 represents days payable outstandin2
@sually a company ac&uires in3entory on credit, which results in accounts payable. "
company can also sell products on credit, which results in accounts recei3able. Eash, therefore, is
not in3ol3ed until the company pays the accounts payable and collects accounts recei3able. 5o
the cash con3ersion cycle measures the time between outlay of cash and cash reco3ery.
This cycle is e?tremely important for retailers and similar businesses. This measure illustrates
how &uicly a company can con3ert its products into cash throu2h sales. The shorter the cycle,
the less time capital is tied up in the business process, and thus the better for the company's
bottom line.
(ear
)nventor#
turnover
*a#s +ales
&utstandin
g
$a#a"le
*eferred
$eriod
Cash
Conversion
C#cle
1334 3(:6 :3(55 144(8 58(,3
1331 1,-(3656 14-( 1-4(-:-: 116(-818
133- 3-(,34, ,(38-8 :1(-6 85(5-5
133, 13(5,5 81(,-,88 14:(:44: 1:4(48
1335 -35(,:3 14,(1341 1-1(6-,- -:(45,8
1336 ,5:(1, 14:(,55 1-5(, ,,4(,515
133 ,8,(8531 14(4:61 1-,(551 ,(58,-
133: 5--(511- 14(6-6, 1-,(8845 546(46-
1338 566(,-- 14(4-4: 1-,(54,- 5,:(35
1A$$
-roadly speain2, a companyGs assets are financed by either debt or e&uity. +"EE is the a3era2e
of the costs of these sources of financin2, each of which is wei2hted by its respecti3e use in the
2i3en situation. -y tain2 a wei2hted a3era2e, we can see how much interest the company has to
pay for e3ery dollar it finances.
" firm's +"EE is the o3erall re&uired return on the firm as a whole and, as such, it is often used
internally by company directors to determine the economic feasibility of e?pansionary
opportunities and mer2ers. It is the appropriate discount rate to use for cash flows with ris that
is similar to that of the o3erall firm.
+%''
1383
4(481:
-
1334
4(4:5
86
1331
4(4:34
3
133-
4(468:
38
133,
4(4:,:
8-
1335
4(4:-
-
1336
4(4:--
16
133
4(4:1
:
133:
4(4:1-
,-
1338
4(4:4:
86
2M of out.ows "otal

18:(
: -58(168 1:(8-5 :1(55-5,
85(1,
--
2M of in.ows N$,

18:(
: -8(185 -,3(:6:1 144(66
815(:,
4
-./012
3.
/ear
Eash
!lows
CB%<.#7
8 #%>.>
# :%B.B#%
: :7$.>;>
7 #88.B;;
IHH %D
,iscounted Pay:ac2
/eriod 2.198.83
,ifferent Investors Pers/ectives
,etroPolitan -an, ,ana2ement, which would ha3e to appro3e any loan, was
concerned with the risCreturn tradeCoff. +ith consideration project finance
e?perience, ,etropolitan was een to consider comple? arran2ements which could
justify hi2her spreads and fees from the borrowers and could entice pro3iders of
capitalC either debt or e?ternal e&uityC with sufficient e?pected return to justify
project ris. ,etropolitanGs le2al department would ha3e to si2n off on any
documentation and had been particularly concerned that offer letters reflect the
inds of detailed specifications of a3ailability, security, representation, warranties,
co3enants and e3ents of defaults which would be re&uired in the final loan
a2reement ne2otiation.
" checlist prepare
The ban of 5urabaya, ha3in2 wored with those projections, it was eenly
aware of the de2ree to which the sales 3olume, cost, price, and timin2
assumption implied in the projections affected project 3iability. It was confident
that the projections constituted a best 2uess as to project outcome, but that the
actual reali=ation would be subject to considerable 3ariation. The ban of
5urabaya considered that, with the participation of other domestic bans, it
could arran2e for as much worin2 capital and shortCterm rupiah financin2 as
the project neededC pro3ided the credit was appropriately structured. It could
ser3e as domestic loan a2ent for project monitorin2 and would be happy to tae
the role as collateral a2ent for loan security. -ecause its 3alued customer,
Hanaffi, was leadin2 the project, the banGs staff members had a stron2
incenti3e to do whate3er they could within the strictures of prudent banin2 to
see the project successfully financed.
9. Alternative $ourses of Action
B.# -y Introducin2 .ew Technolo2y
The in3estors ar2ued that they were tain2 a hi2h ris in in3estin2 in a
facility usin2 plantation technolo2y untested in Indonesia. 4nly after :88#
(after the first plantation trees on the clearCcut land had matured and had
been har3ested1 would the feasibility of that technolo2y be established.
Hence, the in3estors had ne2otiated with the 2o3ernment considerable
discount on the timber ta?, which constituted the lar2est part of the annual
timber costs. ,ore important, they still had the ri2ht to use the Kalimantan
forest site from which they were permitted to har3est hardwood lo2s for up
to ten years, pro3ided the project was implemented. The in3estors planned to
concentrate lo2 har3estin2 in the early years, which would both meet the
clearCcuttin2 needs of the plantation and ma?imi=e early cash flow for debt
ser3ice. The lo2s would be sold to the in3estorsG own mills elsewhere in
Indonesia, and were e?pected to brin2 profits to those mills of rou2hly >;D
of their purchase price from Kalimantan parer. In addition, contract for the
preproduction site, ci3il wors not part of the turney contract, and marine
insurance on e&uipment shipments were e?pected to be awarded to interests
under the control of the in3estors.
B.: ,inimi=in2 Eost
Kamaura -an of 0apan had fle?ibly pro3ided lowCcost facilities to hanaffi on
many occasions, and other members of the in3estors had wored with its leasin2
subsidiary in 0aarta. The in3estors had ori2inally en2a2ed ,etropolitan as its
financial ad3iser because of the banGs projectCfinancin2 e?perience and contacts
with e?port credit a2encies. They 3iewed ,etropolitan as entitled to its success fee
if it earned it by leadCmana2in2 the final financin2 paca2e. Their ac&uaiance
withe deutsche Handelsban was recent but positi3e. They were een to use the
e?port credit loans which )eutsche Handelsban was helpin2 to arran2e and to
tae ad3anta2e of the %D concessionary @.5. dollar financin2. .otwithstandin2 the
cashflow projections and ne2otiations carried on to date, howe3er, the in3estors
remained hi2hly fle?ible with re2ard to the capital structure of the project. The
would consider any serious financin2 alternati3e.
6specially in brin2in2 new technolo2ies to Indonesia, and as because that support
would be seen as a si2nal to the international business community of the
fa3ourable Indonesian climate. Howe3er. The ,4! was e&ually concerned that it
be seen as e3enChanded, especially in the li2ht of the fact that the project in3ol3ed
one of the countryGs depletable natural resources hardwood timber stands.
If Kalimantan paper were to be eli2ible for e?port credits, those e?port credit loans
would ha3e to be 2uaranteed either by the Indonesian ,4! or by a wellCnown
commercial ban in a de3eloped country. The 2uaranteein2 commercial ban could
e?tend its 2uarantee in return for appropriate 2uarantee fees and credit support. The
form of that credit support was a matter of ne2otiation, but mi2ht tae the form of
counter 2uarantees (from other international bans, local bans, business entities,
wealthy indi3iduals, etc.1.,ort2a2es or liens o3er property, assi2nment of proceeds
of contracts and commercial 2uarantees, assi2nment of tae or pay contracts,
2o3ernment undertain2s with re2ard to preferential treatment of the project or
letters of comfort. 4fficial application to e?port credit a2encies for fundin2 could
only be made by the e?porter. Howe3er, because of bansG in3ol3ement with
lendin2, especially in the second structure described abo3e, the help of a ban in
securin2 ad3anta2eous e?port credit terms for any lar2e e?port of capital
e&uipment was often useful. Thus K.) had secured for the Kalimantan paper
project, initially with the help of ,etropolitan and later with the support of
)eutsche Handelsban, the e?port credit a2enciesG letters of intent.
B.7 0oint 3enture
K.) as the projectGs principal contractor.
9.. 3y $ontracting Bith (eB "u//lier from 3raCil
Here is an opportunity of buyin2 their raw materials from -ra=il. -ecause in -ra=il there is a
forest plantation of fastest 2rowin2 tropical pine and eucalyptus, which mature in % to #< years
and this can pro3ide a cheaper source of hi2h &uality pulpwood for paper, where it taes :; to ;8
years to mature in .orth "merica and 6urope. Indonesia can tae this opportunity to buy the raw
materials from -ra=il. If they can brin2 it in cheaper cost by a contract with -ra=il then it can
able to minimi=e its raw material cost and which leads a hi2her return. -y this way in3estors will
also be able to 2et hi2her returns.
B.< -y Issuin2 Eommon 5toc
This Kalimantan Paper Project is financed by tain2 more debt and less e&uity. +hen any
company or country taes more debt than e&uity then power 2oes to the debt holders. "nd many
co3enants restricted the mana2ement decisions. The same problem will arise in this project. 5o if
we issue more common stoc in the maret to raise our capital then debt holder will not be able
to 2et more power.
7. Analysis of 'ach Alternative