The beta for coal mining companies was estimated to be 1.4, and the equity risk premium for projects in Indonesia was 8.8%. The most recent government benchmark interest rate was 7.5%. The Indonesian stock market performance, the Indonesian rupiah and U.S. dollar exchange rates, and the Indonesian inflation rates are presented in Exhibits 6, 7, and 8, respectively. The finance manager also prepared the cash flow forecasts for this investment based on the prevailing Indonesia corporate tax rate of 25%.

A) What are the key variables that could be used for Sensitivity/Scenario Analysis? These are the most important variables that are used in calculating NPV of the project and have a large impact when they are changed even by a small amount. Use one of these variables to show how the answer to the first question on page 3 of Diamond Energy case would change.

B) List some of the key risk factors involved in making this acquisition. Briefly describe why each of these is a risk factor.

C) What might be the benefits of making this acquisition?

Exhibit 6: Indonesian Stock Market (JCI) Performance, 1998 to November 2015. JAKARTA COMPOSITE 5500 4400 3300 2200 1100 LLLL 1998 2002 2006 2010 2014 Source: Trading Economics (http://www.tradingeconomics.com/indonesia/stock-market). Exhibit 7. Exchange Rates (Indonesian rupiah per US$) from January 1, 2011-November 1, 2015. 15,000.0 14,000.0 13,000.0 12,000.0 11,000.0 10,000.0 9.000.00 8,000.00 Jan 1, 2011 Jan 1, 2012 Source: Oanda Historical Exchange Rates. Jan 1, 2013 Jan 1, 2014 Jan 1, 2015 Exhibit 8a. Historical Inflation Rates in Indonesia 2016 2014 2012 2010 2008 2006 re: www.tradingeconomics.com; Statistics Indonesia. Exhibit 8b. Inflation Rates in Indonesia in 2015 8.36 7.15 7.26 7.267 48 6.96 6.79 ... 6.83 6.29. 6.38 6.25 4.89 Jan 2015 Apr 2015 Jul 2015 Oct 2015 Source: www.tradingeconomics.com; Statistics Indonesia. Exhibit 6: Indonesian Stock Market (JCI) Performance, 1998 to November 2015. JAKARTA COMPOSITE 5500 4400 3300 2200 1100 LLLL 1998 2002 2006 2010 2014 Source: Trading Economics (http://www.tradingeconomics.com/indonesia/stock-market). Exhibit 7. Exchange Rates (Indonesian rupiah per US$) from January 1, 2011-November 1, 2015. 15,000.0 14,000.0 13,000.0 12,000.0 11,000.0 10,000.0 9.000.00 8,000.00 Jan 1, 2011 Jan 1, 2012 Source: Oanda Historical Exchange Rates. Jan 1, 2013 Jan 1, 2014 Jan 1, 2015 Exhibit 8a. Historical Inflation Rates in Indonesia 2016 2014 2012 2010 2008 2006 re: www.tradingeconomics.com; Statistics Indonesia. Exhibit 8b. Inflation Rates in Indonesia in 2015 8.36 7.15 7.26 7.267 48 6.96 6.79 ... 6.83 6.29. 6.38 6.25 4.89 Jan 2015 Apr 2015 Jul 2015 Oct 2015 Source: www.tradingeconomics.com; Statistics Indonesia