Alusaf Hillside Project Essay

634 Words Nov 11th, 2012 3 Pages
1. Is primary aluminum production an attractive industry? Why or why not?
I consider primary aluminum production is not an attractive industry because : a. The product is identical (ie, aluminum), all the companies procure the same resources to make production with same production line and process. The firms only differentiate in terms of controlling and lowering the variable cost in order to make a profit as a price-takers. Pricing is somehow fix in global level as aluminum is openly traded in the financial market. b. Intensive rivalry and perfect competition. Since the collapse of the Soviet Union and Russia and the other former Soviet states surged the supply and flooded world markets while having price remains
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4. Given the above prediction, should Alusaf build the proposed Hillside smelter if the required ROI (return of investments) per year is 10%? How about 15%? Is your recommendation sensitive to any other assumption you made?
Projected Hillside’s total cost (operating cost + capital investment)

Variable cost : ($ per ton)
Power and alumina 41% of aluminum price Other raw material 143 Consumables 32 Freight 40 Fixed cost : Plant power and fuel 17 Maintenance 38 Labor 68 General and administrative 32

Capital cost :
$1.6 billion / 466 thousand tpy = $3,433 (cost of capital per ton of capacity)

If the required ROI per year at 10%, target price should be :
(41%)*P + (143+32+40) + (17+38+68+32) + (3433*10%) = P
P – (41%)*P = 215 + 155 + 343
0.59P = 713
P = $1,208.47

If the required ROI per year at 15%, target price should be :
(41%)*P + (143+32+40) + (17+38+68+32) + (3433*15%) = P
P – (41%)*P = 215 + 155 + 515
0.59P = 885
P = $1,500

Therefore to support Alusaf to build the proposed Hillside smelter, it must expect the future price should be around $1208 (for ROI at 10%) or $1500 (for ROI at 15%) to justify the investment.

According to the CAGR, the growth rate of 2% in 5 years later resulted a projected demand at 20,384 thousand tpy with target price around $1,510. Therefore, it is a good investment for Alusaf to

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