LesStroy LLC

LesStroy LLCCase Analysis: Capital Budgeting

Joint Venture - Terry McDonald and Oleg Topolev

Invest in a wood products manufacturing facility in RussiaHigh quality, low cost logsLow cost labor in RussiaUse of Western-style manufacturing standards

Terry McDonalds family expertise in wood industry

Oleg Topolev expertise with Russian business customs

Strategic OpportunityInclude Financial model AssumptionsOrganizational Structure

Country Specific Operations

Reporting Relationships

Credibility, Accountability and Transparency

Structured and documented processes

The entire Organization and the designations are country specific and only for the purposes of the Joint venture.LesStroy Strategy - Proposed ProjectsAchinsk ProjectCapex $204.7 million Achinsk plant would have a strategic advantage in terms of logistics due to its close proximity to the Junction of the trans-Siberian Railway as well as the city of Krasnoyarsk

Bratskt ProjectCapex $45 million in a wood manufacturing facility in Bratskt.City of Bratskt is located on the Angara River in the Irkutsk Oblast of the Siberian territory in RussiaCity's economy is largely reliant on heavy industryMention Capex investments in both projects and bit of detailsFinancial Forecast - Achinsk Plant

Production output of Achinsk ProjectKey Elements for Revenue and Cost. Financial Forecast - AchinskNPV Analysis 01234567891011Revenue102,958,800118,145,223136,523,369141,984,304141,984,304143,362,792146,230,048149,154,649152,137,742155,180,497Cost78,750,00088,380,625100,101,700103,705,768103,705,768104,767,629106,662,981108,596,241110,568,166112,579,529EBIT24,208,80029,764,59836,421,66938,278,53638,278,53638,595,16339,567,06640,558,40841,569,57642,600,967Tax5,325,9366,548,2128,012,7678,421,2788,421,2788,490,9368,704,7558,922,8509,145,3079,372,213EAT18,882,86423,216,38628,408,90229,857,25829,857,25830,104,22730,862,31231,635,55832,424,26933,228,755Depreciation Add Back15,680,00015,680,00015,680,00015,680,00015,680,00015,680,00015,680,00015,680,00015,680,00015,680,000Disposal Proceeds39,200,000CFFA34,562,86438,896,38644,088,90245,537,25845,537,25845,784,22746,542,31247,315,55848,104,26988,108,755Working Capital30,000,000Project Cost200,000,00030,000,000Total200,000,000Net-200,000,000-30,000,00034,562,86438,896,38644,088,90245,537,25845,537,25845,784,22746,542,31247,315,55848,104,269118,108,755Net Present Value$22,661,873 IRR12.90%NPV and IRR AnalysisFinancial Forecast - Bratskt Plant NPV Analysis 01234567891011Revenue23,533,44027,004,62231,205,34132,453,55532,453,55532,768,63833,424,01134,092,49134,774,34135,469,828Cost18,014,28620,215,57122,894,67423,718,46123,718,46123,961,17224,394,39624,836,28425,287,00925,746,750EBIT5,519,1546,789,0518,310,6678,735,0948,735,0948,807,4669,029,6159,256,2079,487,3329,723,078Tax1,214,2141,493,5911,828,3471,921,7211,921,7211,937,6421,986,5152,036,3662,087,2132,139,077EAT4,304,9405,295,4606,482,3206,813,3736,813,3736,869,8237,043,1007,219,8427,400,1197,584,001Depreciation Add Back3,600,0003,600,0003,600,0003,600,0003,600,0003,600,0003,600,0003,600,0003,600,0003,600,000Disposal Proceeds9,000,000CFFA7,904,9408,895,46010,082,32010,413,37310,413,37310,469,82310,643,10010,819,84211,000,11920,184,001Working Capital6,750,000Project Cost45,000,0006,750,000Total45,000,000Net-45,000,000-6,750,0007,904,9408,895,46010,082,32010,413,37310,413,37310,469,82310,643,10010,819,84211,000,11926,934,001Net Present Value$5,914,394 IRR13.20%

Risk Categories

OperationalFinancialPeopleGovernanceRegulatoryStrategicStrategic RisksEnvironmental Impact Time Zone DifferenceClimate Change ControlGeographic DispersionMarket RiskRail-Road ConnectivityRisk and Mitigation Strategy - I

StrategicEnvironmental Impact StudyTime Zone DifferenceClimatic ChangeGeographic DispersionMarket RiskRail Road Connectivity

Risk and Mitigation Strategy - IIRegulatoryBureaucratic HurdlesRegulation Risk/LicencesImporting problems

Corporate GovernanceCorporate GovernanceQuality/Internal Controls

RegulatoryBureaucratic HurdlesRegulation Risk/LicencesImporting problems (Increased Lead Times)

GovernanceCorporate GovernanceQuality Control / Internal Controls

Risk and Mitigation Strategy - IIIOperation Shipping and logistics Business Disruption RiskChoice of portsOperating millsPrices for Inputs and ProductsDemand commitment Customer credit risks

OperationalShipping and LogisticsCompletion RiskSecure Supply / Inputs/ Raw material and Energy PriceDemand Commitment/Customer Base/ End product Price RiskCost Control / Bargaining Power with new suppliersChoice of PortsAvailability and acceptability of woodCustomer credit risks

FinancingCurrency risk Funding risk Sovereign riskPeopleCorporate culture Communication issues Employee safety

Risk and Mitigation Strategy - IV

FinancingForex ExposureFunding IssuesSovereign Risk (Russia And U.S. Specific)

PeopleCorporate Culture DifferencesCommunication issues/ Language BarrierEmployee Safety

Recommendation The Achinsk and Bratskt Project represent an opportunity for the company to enter the plywood market in Russia.The project expects to generate 13% of the return on investment with net present value of $ 22 million dollars.The less up-front equity, the better return on investment the project will generateMulti-sourced financing would better serve the required amount of capital for the project.

Advantages:Capacity of CapitalFlexibilityMinimize CostLocal ParticipationLess Risky Budgeting Alternatives

Funding RecommendationQ & A Thank You !!!Presented By :Tony NguyenSarah CaugheySiman QiaoNiranjan Zende