Capital Budgeting Analysis of Broiler Farm Construction in Central Java

: Indonesia, positioned as a prominent emerging market, draws its economic strength from a diverse mix of agriculture, manufacturing, and a thriving services sector. The nation's strategic location, coupled with abundant resources and a youthful population, forms a resilient economic foundation that has contributed to its sustained growth. One notable sector that plays a pivotal role in meeting the country's protein needs is the poultry industry. Chicken consumption has risen to 7.41 kilograms per capita yearly, indicating a substantial 9.23% increase from 2020. Against this backdrop of economic vibrancy and shifting consumption patterns, PT.XYZ, a key player in the poultry industry, is strategically positioning itself for expansion. Recognizing the immense potential within Indonesia's dynamic poultry sector, PT.XYZ is planning to enhance its broiler meat production capabilities through the construction of new broiler chicken farm facilities. This research endeavours to provide PT.XYZ with a comprehensive feasibility analysis for the envisioned broiler chicken farm facilities. The proposed facilities are designed to produce a significant volume, with a capacity of up to 16.8 million chickens annually, equivalent to approximately 29,3 million kilograms of chicken meat per year. The construction timeline is strategically set for two years, spanning from September 2024 to October 2026. The research findings present a compelling case for the feasibility of PT.XYZ's ambitious broiler farm construction project. Financial indicators reveal a positive Net Present Value, an Internal Rate of Return that exceeds the Weighted Average Cost of Capital (WACC), and a Payback Period of five years, aligning with the company's strategic plans. These results underscore the financial viability and attractiveness of the proposed expansion.

As these new broiler farm facilities come to fruition, their impact extends beyond meeting the immediate consumer needs.They represent a tangible step toward bolstering the nation's food security and supporting local economies through job creation and agricultural development.Moreover, these investments underline the industry's commitment to continuous improvement, aligning production practices with evolving consumer preferences and international standards.By embracing innovation and scaling up production capacity, the Indonesian poultry sector is poised to not only satisfy the current surge in chicken meat consumption but also lay the foundation for a resilient and dynamic agricultural future.
Therefore, in order to gain the opportunity in the ever growing chicken meat consumption, PT.XYZ is planning to construct a new broiler farm facility which consisted of 6 flocks with estimated productivity of 16.800.000chicken per year.With the construction of the new broiler farm facility, PT.XYZ hoped that it can further gain more market share in the broiler chicken meat industry in Indonesia.
The primary objective of this research is to conduct a comprehensive analysis of the feasibility of the Broiler Farm project.The first aim is to delve into the intricacies of the project, evaluating its viability from financial perspectives.This involves a thorough examination of Net Present Value, Internal Rate of Return, Payback Period, and Profitability Index.By scrutinizing these elements, author aim to provide an understanding of the project's feasibility from financial perspectives, enabling stakeholders to make informed decisions.
Furthermore, the research seeks to identify and prioritize variables that significantly influence the overall feasibility of the Broiler Farm project.In doing so, we aim to pinpoint the key factors that have a substantial impact on the success or challenges faced by the project.The identification of these critical variables is crucial for stakeholders as it allows for a targeted approach in addressing potential obstacles and optimizing the project's chances of success.

THEORETICAL FOUNDATION Capital Budgeting Analysis
Capital budgeting is the process of identifying, evaluating, and selecting investments in long-term assets (Shapiro, 2019).The process of project valuation analysis using capital budgeting methods is essential for selecting financially viable projects that enhance a company's value.It serves as a means for investors to determine the worth of a potential investment project.Within the capital budgeting process, management faces the task of deciding which long-term assets, often involving substantial financial resources, the company will acquire.The Discounted Cash Flow (DCF) approach is employed to make informed decisions regarding capital budgeting.This established valuation framework is directly tied to finance theory, aligning with the objective of maximizing the company's value through corporate management decision-making.It focuses on what finance deems the most significant, and in some cases, the sole valuation factor-the present value of anticipated cash flows.

Financial Projection
Financial projection is the process of estimating future financial performance of an organization based on assumptions about future events (Rahim & Malik, 2003).This forward-looking analysis typically involves predicting key financial metrics such as revenue, expenses, profits, and cash flows over a specific period, often one to five years.Financial projections are an integral part of strategic planning and decision-making, providing insights into the potential outcomes of various business strategies and helping management allocate resources effectively.These projections are essential for communicating the company's expected financial performance to stakeholders, including investors, lenders, and internal decision-makers.They serve as a roadmap for the organization, guiding budgeting, investment decisions, and overall financial management.
Creating accurate financial projections requires a thorough understanding of the business environment, industry dynamics, and the company's internal operations.Assumptions about factors like market demand, pricing, and operating costs play a crucial role in shaping these projections.Regular monitoring and updating of projections are essential as conditions change, allowing businesses to adapt their strategies in response to evolving circumstances.While financial projections involve a level of uncertainty, they are valuable tools for strategic planning, risk management, and assessing the financial health of a business in the foreseeable future.
Financial projection lengths often follow the lifespan of a business's longest-lived asset for several reasons.Matching projections with depreciation schedules ensures accurate cost reflection and informs replacement needs.Aligning projections with loan terms and bond maturities minimizes financial risk and strengthens lender confidence.This timeframe also fosters strategic planning for growth, risk mitigation, and aligning investments with asset lifecycles.While not a rigid rule, this approach provides a solid foundation for informed financial decisions, risk management, and long-term success.

Risk Analysis
Risk analysis is a systematic process of identifying potential risks, assessing their likelihood and impact, and developing responses to them (Rocha, Oliveira, & Capinha, 2020).Risk analysis is a crucial component of decision-making processes, particularly in complex projects where uncertainties can significantly impact outcomes.Sensitivity analysis and Monte Carlo simulation are two powerful techniques employed in risk analysis to quantify and manage uncertainties.

RESEARCH METHODOLOGY Weighted Average Cost of Capital Calculation
The weighted average cost of capital (WACC) is the average rate of return a company must earn on its existing capital to satisfy its investors and creditors (Gitman, 2014).It represents the average rate of return that a company needs to generate in order to satisfy its capital providers, such as equity shareholders and debt holders.WACC takes into account the proportion of different sources of capital, namely debt and equity, and the respective costs associated with each.

Net Present Value Calculation
Net Present Value (NPV) is a fundamental concept in capital budgeting, representing the present value of all expected cash inflows minus the present value of all expected cash outflows over the life of an investment.It helps determine whether an investment is financially viable and creates value for the company (Gitman, 2014).
The concept behind NPV is based on the time value of money, which states that the value of money today is worth more than the same amount of money in the future due to factors like inflation and the opportunity cost of capital.By discounting future cash flows to their present value, NPV takes into account the timing and risk associated with receiving or paying those cash flows.The decision criteria if NPV is used as a parameter of accept-reject decision are :  If the NPV is greater than 0, then accept the project. If the NPV is less than 0, then reject the project.

Internal Rate of Return Calculation
The internal rate of return (IRR) is the discount rate that makes the net present value of an investment equal to zero (Gitman, 2014).In other words, it is the rate of return that would make the present value of cash inflows equal to the initial investment.The IRR represents the potential rate of return that the company would achieve by investing in the project and receiving the specified cash inflows.
Equation 3. Internal Rate of Return Formula Where : CFt = Cashflow during a single period of t CF0 = Cashflow during initial period of project t = Number of timer periods IRR = Internal rate of return of the project The decision criteria if IRR is used as a parameter of accept-reject decision are :  If the IRR is greater than the cost of capital, then accept the project. If the IRR is less than the cost of capital, then reject the project.

Payback Period Calculation
The payback period is a simple and widely used capital budgeting technique for evaluating the time it takes for an investment to recover its initial cost.While not as comprehensive as other methods like NPV and IRR, it offers a quick and easy way to assess project liquidity and risk (Gitman, 2014).In the instance of an annuity, the payback period is determined by dividing the initial investment by the annual cash inflow.However, for a mixed stream of cash inflows, the yearly cash inflows need to be accumulated until the initial investment is fully recovered.Despite its popularity, the payback period is generally considered a less sophisticated capital budgeting technique since it does not explicitly account for the time value of money.
When the payback period is used to make accept-reject decisions, the following decision criteria apply:  • If the payback period is less than the maximum acceptable payback period, accept the project. • If the payback period is greater than the maximum acceptable payback period, reject the project.

Profitability Index Calculation
The profitability index (PI) is the ratio of the present value of all expected cash inflows to the initial investment of an investment (Gitman, 2014).This variation of the Net Present Value (NPV) rule provides a ratio that helps companies make decisions about the viability of potential projects.In a scenario where a project involves an initial cash outflow followed by subsequent cash inflows, the PI is calculated by dividing the present value of the cash inflows by the initial cash outflow.The decision criterion associated with the profitability index is straightforward: if the index is greater than 1.0, it suggests that the present value of the expected cash inflows exceeds the initial cash outflow.Consequently, a PI greater than 1.0 implies a positive net present value, indicating that the project is likely to generate more cash than it consumes.Companies typically use a PI threshold of 1.0 as a decision rule, choosing to invest in projects only when the index exceeds this value.
Essentially, a profitability index greater than 1.0 aligns with a positive NPV, signifying that the project is expected to create value and contribute positively to the company's financial position.Importantly, the relationship between NPV and PI ensures consistency in decision-making.Both methods, whether based on NPV or PI, will lead to the same conclusion regarding the attractiveness of a particular investment opportunity.Therefore, the profitability index serves as a practical tool for companies to evaluate and prioritize potential projects in their capital budgeting processes.

Sensitivity Analysis
Sensitivity analysis is a technique used in financial modelling and decision-making to assess how changes in key variables or assumptions impact the outcomes of a model or project.It helps to gauge the sensitivity or responsiveness of the results to different input parameters, providing insights into the potential risks and uncertainties associated with a particular decision or forecast.
In sensitivity analysis, various scenarios are created by adjusting one or more variables within a predefined range, while keeping other variables constant.By examining the resulting changes in the model's output or financial metrics, decision-makers can assess the robustness of their decisions and identify critical factors that have a significant impact on the outcomes.
Sensitivity analysis helps decision-makers gain a deeper understanding of the potential risks and uncertainties surrounding their decisions.It provides valuable insights for risk management, strategic planning, and project evaluation, enabling more informed and robust decision-making.

ASSUMPTIONS General Assumptions
The general assumptions in financial projections serve several important functions in the planning and forecasting process.These assumptions provide a framework for estimating future financial performance and guide decision-making within a company.The general assumptions used in this financial projection will be shown in the table below.

Production Plan
The first data that author need in order to calculate the financial feasibility of the project is company's production plan.In this case, the company had already planned its production plan for the next 10 year and in this case, the production will start after each flock construction finished, so it doesn't need to wait all flock to be constructed.Selling price of the meat that is used by author is according to Regulations of The National Food Agency of The Republic of Indonesia Number 5 Year 2022 and author took the middle price of the regulation and will increase each year following the inflation rate.The production plan of the company will be shown in the table below.

Cost of Goods Sold Assumption
Second data that author need is company's product cost of goods sold.The data that is collected are mostly company's strategic plan which comes from their experience and historical data of running the business.For day old chick (DOC) price, author used Government Price Regulation which named PPBN No 5 2022 which regulates the price of day old chick (DOC) and author will use its highest price.All of the price will increase each year following the inflation rate.Data that has been collected by author will be shown in the table below.

Capital Expenditure Plan
Capital expenditure in this project will be divided into two, fixed asset capital expenditure and net working capital expenditure.For fixed asset capital expenditure, data that author collected are mostly company's strategic plan including schedule of the project.For working capital expenditure, author calculated it by subtracting current asset with current liabilities in the following year.Data that has been collected and calculated by author will be shown in the table below.Operational Expenditure Assumption Fourth data that author need is company's operational expenditure.The data that is collected are mostly company's strategic plan which comes from their experience and historical data of running the business.Data that has been collected by author will be shown in the table below.

Asset Economic Life and Depreciation Assumptions
In this sub chapter, author will assume economic life of each asset in this project.Economic life would be assumed based on Indonesia Directorate General of Taxation and depreciation method that is used will be straight line method.Economic life of each asset and its depreciation rate in this project will be shown in the table below.

RESULT AND DISCUSSIONS Loan Schedule
In this sub chapter, author calculated the loan schedule using Microsoft Excel.Interest during construction and debt provision cost will be capitalized as increase in asset price.Interest rate that is used in this research is 8,4%, calculated by averaging Investment Credit Interest Rates by Bank Group data found in Central Bureau of Statistics of Indonesia from 2021 until 2023 and the loan tenor in this research is 6 year including 6 month grace period.Recap of calculation will be shown in the table below.

Depreciation and Ammortization Schedule
In this sub chapter, author will calculate depreciation and amortization cost of each asset in the project.Author will be using straight line method and the rate of depreciation had been calculated in previous sub chapter.Interest during construction and debt provision cost calculated in the loan schedule will be capitalized as increase in asset value proportionally.Recap of depreciation and amortization schedule calculation will be shown in the table below.

Income Statement
In this sub chapter, author will project company's income statement.Revenue calculated by multiplying meat produced in the year and selling price on that year.In this research, the base assumption on the quantity sold would be 100% of the meat produced that year.Recap of the calculation that has been done will be shown in the table below.First step in calculating NPV, IRR, Payback Period, and Profitability Index, is determining project's initial cashflow.To determine project's initial cashflow, author will use project's fixed capital expenditure data that has been collected.Summary of the initial cashflow will be shown in the table down below.After calculating all cashflows, author calculate NPV with "=NPV" formula in Microsoft Excel, and then to calculate IRR author use "=IRR" formula in Microsoft Excel.And then to calculate payback period, author simply use "=countif" formula with criteria accumulated cashflow lower than 0 and than add it by 1. Lastly to calculate profitability index author simply divide project's NPV with its initial cost.Summary of the calculation will be shown in the table below.

Sensitivity Analysis
To conduct sensitivity analysis, author will increase and decrease each variable by -20% and +20% and then analyze the difference of NPV that it affects.And then author organized it from the highest range of NPV changes to the lowest.Result of the analysis will be shown in the figure below.

CONCLUSION
From the result of analysis that has been done, author can conclude that the project that is planned by PT.XYZ is feasible as the project has Rp2.583.096.880.095,80NPV value which is >0, IRR of 47,66% which is greater than the discount rate, payback period of 4 year less than the loan tenor which ends in 5 year, and profitability index of 6,73 which is greater than 1.0.
From the sensitivity analysis that has been done, author concluded that variable that affect NPV of the project the most to the least are quantity sold realization, price unit realization, corn price, soybean price, day old chick price, initial cost, long term debt interest rate, inflation rate, and last but not least is its mortality rate.From the result of sensitivity analysis, author can identify and narrow potential risk that can occur in the project into market fluctuation risk, disease outbreak, and construction cost overrun risk.
After knowing the result of analysis in this research, author summarized some method to further reduce risk of the project such as : 1. Form Strategic Partnerships The first recommendation involves the proactive management of market fluctuation risks through the establishment of strategic partnerships.Specifically, the proposed partnerships are envisaged with key suppliers raw materials, including feed - suppliers and day-old chick providers.This strategic alliance aims to leverage the company's long-term commitment to purchasing substantial quantities, thereby securing a more stable supply chain and potentially lowering costs.Additionally, forming partnerships with wholesale buyers is advised, anticipating that the product will experience increased market traction and be seamlessly distributed in larger quantities.By strategically aligning with both input suppliers and wholesale buyers, the company positions itself to navigate market with resilience, ensuring a more robust and sustainable business model.

Insurance Coverage
Securing comprehensive insurance coverage emerges as the second crucial recommendation for safeguarding the company's interests.Specifically, the proposal suggests implementing livestock insurance to shield the business from potential risks associated with diseases and accidents that may impact the company's livestock.By incorporating this insurance solution, the company can effectively mitigate the adverse effects of unforeseen events, ensuring resilience in the face of challenges and safeguarding its assets.This strategic measure serves as a proactive step in fortifying the company's financial stability and operational continuity, offering a layer of protection against the unpredictable nature of livestock-related uncertainties.

Advanced Technology Adoption
The third pivotal recommendation involves the integration of cutting-edge technologies to elevate operational efficiency and risk management within the poultry farming enterprise.Specifically, the proposal suggests the implementation of advanced technologies such as Internet of Things (IoT) sensors for the real-time monitoring of poultry health.This proactive approach enables swift detection and response to potential health issues, fostering a healthier and more resilient flock.Additionally, the adoption of automated biosecurity systems serves to fortify disease prevention measures, mitigating the risk of outbreaks and safeguarding the overall well-being of the poultry.Furthermore, the incorporation of data analytics into the operational framework enhances the company's ability to detect and manage risks effectively, providing valuable insights for informed decision-making.By embracing these technological advancements, the company can establish itself at the forefront of innovation, ensuring a more sustainable and adaptive approach to poultry farming in the face of dynamic challenges.

Hiring Construction Supervising Consultants
The fourth crucial recommendation entails contemplating the engagement of construction supervising consultants, especially if the company lacks an internally dedicated division for project oversight.This strategic move is aimed at ensuring the seamless execution of the project without succumbing to cost overruns.By enlisting the expertise of construction supervising consultants, the company gains access to specialized professionals who can diligently oversee and manage the various facets of the construction process.Their role extends beyond mere supervision, encompassing the critical task of averting potential budgetary excesses and guaranteeing the efficient utilization of resources.This external perspective brings a wealth of experience and knowledge, serving as a valuable asset in navigating the complexities of construction projects and safeguarding the company's interests.Embracing this recommendation is pivotal for maintaining project integrity and achieving successful outcomes within defined budgetary constraints.
= (  ×   ) + (  ×   ) + (  ×   ) Equation 1. WACC Formula Where : ra = Weighted average cost of capital ri = Cost of debt rp = Cost of preferred stock rr = Cost of retained earning rn = Cost of new common stock wi = Proportion of long-term debt in capital structure wp = Proportion of preferred stock in capital structure ws = Proportion of common stock equity in capital structure during a single period of t CF0 = Cashflow during initial period of project t = Number of timer periods r = Discount rate of return that could be earned in alternative investments during a single period of t CF-= Cashflow during initial period of project t = number of timer period r = Discount rate of return

Table I .
General Assumptions

Table II .
Production Plan

Table III .
Cost of Goods Sold Assumptions

Table IV .
Fixed Asset Capital Expenditure Plan

Table VI .
Operational

Table VII .
Asset Economic Life and Depreciation Costs that are categorized as other cost will be consisted of tax and bank interest rate.Tax rate that is used in this research will be taken from The Harmonized Tax Law (HTL) or Law No. 7/2021.Bank interest rate that is used in this research will be calculated by averaging Investment Credit Interest Rates by Bank Group data found in Central Bureau of Statistics of Indonesia from 2021 until 2023.Data that has been calculated and collected will be shown in the table below.

Table VIII .
Other Cost Assumptions

Table IX .
Loan Schedule

Table X .
Depreciation and Ammortization Schedule ISSN:

Table XI .
Income Statement ISSN:

2581-8341 Volume 06 Issue 12 December 2023 DOI: 10.47191/ijcsrr/V6-i12-88, Impact Factor: 6.789 IJCSRR @ 2023 www.ijcsrr.org 8406 * Corresponding Author: Guritno Suro Amijoyo Volume 06 Issue 12 December 2023 Available at: www.ijcsrr.org Page No. 8395-8410 Cost of Equity Calculation
Author's AnalysisThe next step is calculating cost of debt and then calculating WACC.All data that is needed to calculate cost of debt and WACC has been found previously.Result of the calculation will be shown in the table below.

Table XIV .
Cost of Equity Calculation

Table XV .
Operating CashflowAfter determining project's initial cashflow, author will project project's operating cashflow.Author project operating cashflow by adjusting project's net profit with interest expense and depreciation cost.Summary of project's operating cashflow will be shown in the table down below.