WESTMORELAND ENERGY, INC: POWER PROJECT AT ZHANGZE, CHINA Case Solution & Answer

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WESTMORELAND ENERGY, INC: POWER PROJECT AT ZHANGZE, Case Solution

Yes, this venture is going to create value for WEI in the future and the key reason behind this is that it has been assumed that the profit before tax is increasing at a rate of 3.25% upto the fiscal year of 2012 as per the exhibits.
Hence, this venture will have the ability to generate sufficient amount of returns, which will ultimately result in the companyâ€™s worth and as well as the increase in the share price of WEI. As a result, it may be able to increase the proportion of investment from 40% upto say 60% and WEI will not have to rely on China. Despite this, it has also been assumed that the rate of return of this project is going to increase in the future as it can be seen from the exhibits that the internal rate of return has been estimated to be almost 39%.
Hence, the shareholders of WEI will be almost 27% better off and it they will be satisfied from this higher rate of return in the future.However,previously the forecast also made an assumption that there will be no increase in the scale of the plant.

Question 5
Are the qualitative concerns or risks that are not captured in the valuation analysis? Discuss any that you identify?

Previously, some of the risks or qualitative concerns have been taken into considerations that are related to the economy of china which is having unpredictability. Despite this, the other risk attached to the valuation analysis is based upon the laws that were place in China. Hence, the laws that were present in China they were not well developed in terms of the foreign investments. Therefore, this may be a cause of concern for the shareholders of WEI because if they are going to make an investment in China and there are no laws attached to the investments made by WEI, then it may result in the risks as well.
Despite this, the other major risk related to the valuation analysis is the exchange rate risk that will also need to be captured in order to enter into the foreign country because WEI is generally a US based company. In addition,if it is going to receive cash flows from China in itscurrency, then this may result in a loss………….

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