Articles

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.

Capacity Planning of New Product in PT Perkebunan Nusantara VIII (Oolong Tea)

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In early 2021 PTPN VIII began producing a new product based on consumer demand, namely oolong tea, within an estimated contract worth IDR 6.000.000.000 of 150 tons. Thus, the firm should be prepared related to the garden and the factory to produce the oolong tea. This research uses a quantitative descriptive method by analyzing the capacity of the garden to provide the raw material for oolong tea; in the process of oolong tea production, the garden can provide 2.5 tons per day, exceeding the calculation of 1.9 tons. However, the machine used for the production process is inadequate. The machine’s capacity is only available to produce 106.78 tons per year, which is below consumer demand. It requires the firm to add three rotary dryer machines. Adding three machines meant oolong tea production reached 150 tons only in 13 hours and 25 minutes. Adding these machines also requires the firm to invest as much as IDR 540,000,000; by this investment value of the machine, the payback period will return in 4,4 years with the machine durability more than 25 years.

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.