In many emerging market countries, concepts such as discount rates are significantly more cumbersome to estimate with any degree of accuracy. Furthermore, capital budgeting techniques can become significantly more difficult to use in practice. The following case is based on real experience, with identities and numbers changed for confidentiality. As part of a consultancy assignment in Dar es Salaam, Tanzania, you have been asked by a private cement manufacturing company to consider the viability of expanding its business operations into the north of the country.
The company has two main rivals in Tanzania: Tanga Cement Company Limited (SIMBA)
(http://www.simbacement.co.tz/) and Tanzania Portland Cement Company Limited (TWIGA)
(http://www.heidelbergcement.com/africa/en/twigacement/home.htm). Both SIMBA and TWIGA are listed on the Dar es Salaam Stock Exchange (www.dse.co.tz). The company that has hired you as a consultant earns about one-quarter the revenues of SIMBA.
The new expansion requires an investment of 5 billion Tanzanian shillings (TSh) and as a result of the investment, you expect a permanent increase in total operating revenues for the firm of TSh800 million. While SIMBA is your closest rival in Dar es Salaam, TWIGA has more extensive operations in the north of Tanzania and so they are more likely to be your rivals in the new investment.
Growth in earnings is possible, but this depends on several factors. First, growth in the economy is uncertain. While Tanzania’s economy has been fairly stable, analysts are uncertain as to how the country will fare in the future. This is largely because of uncertainty in international donor funding as a result of the recession affecting donor countries. Second, inflation appears to be higher on the streets than the government statistics suggest. Your estimates are that a more appropriate inflation figure is 3 per cent higher than existing government statistics present. Third, the demand for industrial expansion (and consequently cement) has in the past been vibrant in Tanzania but the future is less certain.
Tanzanian economists are predicting that the country will continue to grow as in the past, less about 1.5 per cent. This is because they expect the global recession will largely bypass Tanzania given that the country’s economy is not tightly integrated into other developed country economies. However, you are not too sure. Table 30.1 in this textbook shows the main import and export partners for Tanzania and the fortunes of these partners will naturally affect the Tanzanian economy.

Later chapters explore the estimate of discount rates in more detail, but for now, we will approach the issue in a more basic way. Given that the financial markets in Tanzania are not well developed, you have decided to survey experts in each sector on the appropriate discount rates to use for your closest rivals, TWIGA and SIMBA. The survey responses have been surprising:

A rule of thumb that you have been given is that you can approximate the growth rate in the economy as a whole by adding GDP growth to the rate of inflation. To then estimate the cost of capital for a private firm, you must add on a risk premium to reflect the increased risk.
The challenge facing you as a consultant is daunting but it reflects reality in many parts of the world. The company has asked you to prepare a report on how you plan to carry out your analysis. Specifically, you must consider the following:

1. Cash Flows: What factors will affect the estimated cash flows? Carry out your own analysis on Tanzania, its economy, the cement industry and its rivals.
2. Growth Rates: What factors will affect the growth rates of the firm? From your own analysis of the company and the project, report on the possible growth rates you may use.
3. Discount Rates: Many of the models presented in later chapters do not work well in emerging markets because good quality price data is not available. Carry out your own investigations into possible discount rates for the project.
4. Funding: We cover financing in detail in later chapters. However, carry out your own analysis into the different sources of funding that are available in Tanzania for a project of this type and size.
5. Capital Budgeting Methods: There are many methods available that you can use. Which ones will you focus on? Explain.

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Table 30.1 Main Import and Export Partners of Selected Countries Australia Austria Bahrain Belgium China Denmark Finland France Germany Greece Hong Kong India Ireland Italy Japan Malaysia Netherlands Norway Oman Poland Portugal Russia Singapore Slovenia South Africa Spain Sweden Switzerland Tanzania Thailand Turkey United Arab Emirates United Kingdom United States Top three export partners China, Japan, South Korea Germany, Italy, Switzerland Saudi Arabia, India, UAE Germany, France, Netherlands Hong Kong, US, Japan Germany, Sweden, UK Sweden, Russia, Germany Germany, Belgium, Italy France, US, UK Turkey, Italy, Germany China, US, Japan UAE, US, China US, UK, Belgium Germany, France, US China, US, South Korea Singapore, China, Japan Germany, Belgium, France UK, Germany, Netherlands China, Japan, UAE Germany, UK, Czech Republic Spain, Germany, France Netherlands, China, Germany Malaysia, Hong Kong, China Germany, Italy, Austria China, US, Japan France, Germany, Italy Norway, Germany, UK Germany, US, Italy India, China, Japan China, Japan, US Germany, Iraq, Iran Japan, India, Iran Germany, US, Netherlands Canada, Mexico, China Top three import partners China, US, Japan Germany, Italy, Switzerland Saudi Arabia, US, China Netherlands, Germany, France South Korea, Japan, Taiwan Germany, Sweden, Netherlands Russia, Sweden, Germany German, Belgium, Italy Netherlands, France, China Russia, Germany, Italy China, Japan, Taiwan China, UAE, Saudi Arabia UK, US, Germany Germany, France, China China, US, Australia China, Singapore, Japan Germany, China, Belgium Sweden, Germany, China UAE, Japan, India Germany, Russia, Netherlands Spain, Germany, France China, Germany, Ukraine Malaysia, China, US Italy, Germany, Austria China, Germany, Saudi Arabia Germany, France, Italy Germany, Denmark, Norway Germany, Italy, France China, India, South Africa Japan, China, UAE Russia, Germany, China India, China, US Germany, China, Netherlands China, Canada, Mexico