Articles

Financial Analysis for Land Reinforcement Project to Optimize Dump Capacity INL Pit Case: Coal Mining Company PT. XYZ East Kalimantan

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PT XYZ, a leading coal mining company in Indonesia located in East Kalimantan, boasts a production capacity of 55 million tonnes annually. Engaging in coal mining and sales for domestic and international clients across diverse industrial sectors, PT XYZ’s INL Area plays a pivotal role in its production for the next eight years, producing low-quality coal with an average calorific value of 4200 Kcal/kg GAR. As a cost leadership business, the company prioritizes cost efficiency, particularly in fuel consumption, notably for overburden movement. To enhance efficiency, PT XYZ explores the optimization of the distance from the mining front of the INL pit to the waste dump. A financial analysis case study compares two scenarios using a financial model: Scenario A, utilizing the recent waste dump with a cycle time of approximately 6.7 km, and Scenario B, proposing a new waste dump design with an investment in borepile reinforcement to accommodate overburden removal for the INL pit, resulting in a reduced cycle time of around 5 km. The financial model assesses feasibility parameters such as NPV, IRR, PI, and PBP between the scenarios, conducting scenario analysis to measure project success probability and identify significant variables affecting project feasibility. A Rsik Analysis on the project considers coal price realization and fuel consumption as key variables influencing the project’s value. The recommended option is Scenario B, presenting higher value for PT XYZ, with an investment in borepile reinforcement yielding a potential NPV of around $144.24 million, an IRR of 33%, and a PBV of 4.2 years.

Feasibility Study for Tugboat Expansion Project Using Capital Budgeting And Sensitivity Analysis (Case Study: PT. ABC)

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The Covid-19 pandemic and the unstable geopolitical environment has highly disrupted the global economy. The turn of events affected businesses sectors differently, due the disruption of the supply chain many industries have to suffer. However, there are sectors that performed well in a very uncertain economic condition. One of the business sectors that flourish during this turbulent time is in the mining sector. The soar in demand for natural resources such as coal, nickel, and construction stones have increased the sector’s operational activity drastically. Being a part of the mining industry supply chain, PT. ABC is a marine transport company that provide delivery services for the minerals by utilizing tugboats and barges. The surge of activity in the mining sector has positively impacted the company. A mining companies has queued up to acquire marine transport services, however it is quite difficult to meet the rapidly demand due to the limited number of tugboats and barges available in the market. To keep up with the market demand, PT. ABC is planning to add and additional set of tugboat and barge to its fleet.

The management’s decision to acquire a new set of tugboat and barge is a sizeable investment for the company. Financial calculations such as the capital budgeting method is needed to support the management’s decision for to invest in the expansion project. Therefore, the objective of this research is to utilize the crucial financial calculations to analyze whether if the expansion plan is worth pursuing.

The research results shows that the expansion project is feasible, by examining the base assumptions by the company’s management. The assumptions consist of the initial investment of Rp 40.500.000.000, an annual growth rate of 8,18%, the assumption of 30 working days for the charter duration, and 10 years useful life of the asset. The project will begin in the year 2023. Furthermore, the sensitivity analysis suggests that the most influential factor for the project’s NPV is the charter rate. Based on the analysis, the minimum charter rate that should be charge to the customer is Rp 834.480.000 per month.

Proposed Capital Budgeting: Should PT.FST Close its Kelambu Division?

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In 2021, the manufacturing industry is Indonesia’s most significant contributor to its Gross Domestic Product (GDP). Within the manufacturing industry, there is a sub-industry called the textile industry. The textile industry in Indonesia is highly fragmented. For instance, there are three niche textile markets: textile for households, textile for clothing, and textile for agriculture. The three segments have different growth of 4%, 7.5%, and 5%, respectively, and this difference in growth rate will create a dilemma for companies. For instance, companies must decide which segment needed to be perused or avoid since each segment will have its opportunities and threats.

PT. FST also faces this dilemma. The differences in each segment’s growth rate are reflected by the company’s sales growth of each product. The sales of plastic products Waring and Benang growth rates are 34% and 52% five years CAGR, respectively. Those are substantial growth compared to the textile products of Kelambu with only 23% five years CAGR. From there, the company’s owner and CEO see a shift in the growth of products sold, from textile products to plastic products. To capture the shifts in demand within the market, he decided to close the Kelambu division to make the company leaner and will be able to focus its resources on the products that will generate revenue the most.

From capital budgeting analysis, the plan of shutting down the Kelambu division will result in a faster payback period of 7.2 years compared to 8 years for the regular cash flow and 8.05 years compared to 8.12 years for the regular cash flow the discounted cash flows. More importantly, it generates a higher NPV of IDR 1,087 bio than IDR 976 bio. In addition, the plan also has a higher Profitability Index and IRR of 6.04 and 25% compared to 5.01 and 22%. From risk analysis, the expected value of the project’s is IDR 1,457 bio, with a probability of NPV less than zero is 8%.

Lastly, this final project contributes to the literature by providing an alternative framework on how to use capital budgeting techniques to compare two expansion plans or closing down divisions within a company. Moreover, other textile industry players, especially SMEs could also refer to this final project if they face a similar dilemma.