PROFITABILITY ANALYSIS - Diponegoro University | Institutional Repository (UNDIP-IR)

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PROFI TABI LI TY

AN ALYSI S

Ek on om i Te k n ik Kim ia

By D r . I st a di

2 0 0 7

Sch e du le

Tim e Value of Money ( I nt er est Rat e) & Cash Flow

Depr eciat ion & Salvage Value

Pr ofit a bilit y An a ly sis

Select ion of Alt er nat if I nvest m ent of Chem ical Plant Equipm ent

Sensit ivit y/ Br eak Even Analysis

Tax Pr incipals ( Dasar - Dasar Per paj akan)

Select ion of Plant Locat ion

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Cor por a t e / Pla n t Obj e ct iv e s

• Maxim ize t he r et ur n on invest m ent

• Maxim ize t he r et ur n on st ockholder ’s equit y

• Maxim ize aggr egat e ear ning

• Max im ize com m on st ock pr ices

• Find out let s for a m ax im um of addit ional

invest m ent at r et ur ns great er t han t he m inim um accept able r at e of r et ur n

• I ncr ease m ar ker shar e

• I ncr ease t he econom ic value added

• I ncr ease ear nings per shar e of st ock

• I ncr ease t he m ar ket value added

Pr oj e ct Cla ssifica t ion

•

Necessit y Pr oj ect ( r educt ion of

oper at ing expenses)

•

Pr oduct im pr ovem ent pr oj ect

•

Pr ocess im pr ovem ent pr oj ect

•

Expansion pr oj ect ( t o m eet incr eased

sales dem and)

•

New vent ur es ( r equir e capit al

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M in im u m Acce pt a ble

Ra t e of Re t u r n

• Pihak m anaj em en m ungk in akan m enaikkan r at e y ang diper luk an unt uk m engant isipasi r esik o pr oj ek at au j ika budget t er bat as

• Manaj em en selanj ut ny a m enent uk an r at e of r et ur n m inim um unt uk suat u pr oj ek .

• Yang per lu diper hat ik an adalah Modal, dar i m ana dipinj am .

• Per usahaan har us ber usaha agar pendapat an lebih besar dar ipada biay a angsur an, dan har us unt ung ( pr ofit able)

• Higher t he r isk, higher t he r equir ed r et ur n

• Today’s econom y Î ROI aft er t ax m inim um : 25-35 % , and Pay out Tim e m axim um : 3 year s

Fa ct or s Affe ct in g M in im u m

Acce pt a ble Ra t e of Re t u r n

•

Cost of Capit al

•

Availabilit y of Capit al ( healt h of

econom y)

•

Com pet ing I nvest m ent s

•

Differ ence in Risks of invest m ent

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Pr ofit a bilit y M e a su r e s

•

Qu a n t it a t iv e M e a su r e s

–

I nt er est Rat e based ( ROI , I RR/ DCFROR)

–

Money / Cash based ( NPV, NFV)

–

Tim e Based ( POT/ Pay back Per iod)

•

Qu a lit a t iv e M e a su r e s

–

Em ploy ee m or ale

–

Em ploy ee safet y

–

Env ir onm ent al Const r aint s

–

Legal Const r aint s

Re t u r n on I n v e st m e n t ( ROI )

•

Mer upak an besar ny a laj u pengem balian

m odal suat u inv est asi

•

Biasany a digunak an analisis pr oj ek dengan

pendapat an r at a- r at a per t ahun

•

Persam aan:

•

ROI can be calculat ed befor e or aft er t ax es

•

Denom inat or could be Fixed Capit al

I nv est m ent or Fix ed + Wor k ing Capit al

•

Pr ofit = incom e - ex penses

ROI =Annual net profit earnings after taxes

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D isa dv a n t a ge of “Re t u r n

on I n ve st m e n t ( ROI ) ”

•

The t im e value of m oney is ignor ed

•

The pr oj ect w ill last t he est im at ed life and

t his is oft en not t r ue

•

Equal w eight is given all incom e for all

y ear s and t hat is not alw ay s t r ue. The

av er aging of pr ofit s per m it s lax it y in

for ecast ing

•

I t does not consider t im ing of cash flow s

•

I t does not consider capit al r ecov er y

Re t u r n on Av e r a ge

I n v e st m e n t ( ROAI )

• Met hod for m easur ing t he pr ofit abilit y of

inv est m ent s ut ilizing account ing dat a and based on aver aging m et hod

• Equat ion:

• Why FCI / 2 ??

– At t he beginning of a proj ect t he ret urn is earned against t he full invest m ent , and at t he end of a pr oj ect t he invest m ent has been fully depr eciat ed and t he capit al has been recovered.

– Therefore, on t he average over t he life of t he inv est m ent , half t he FCI is inv olv ed.

• Kelem ahan ? Sam a dengan ROI

ROAI =Annual net profit earnings after taxes

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Pa y ba ck Pe r iod/ Pa y ou t

Tim e ( POT)

• Ot her t er m s: Payback Per iod, Payout Tim e.

• To calculat e t he am ount of t im e t hat w ill be r equir ed t o recover t he depreciable FCI from t he accrued cash flow of a pr oj ect .

• Equat ion:

• The denom inat or m ay be t he averaged annual cash flow or t he individual year ly cash flow s. This could be aft er or befor e t ax.

• Disadvant ages:

– No consider at ion t o cash flow or t im e v alue of m oney

– The m et hod m ak es no pr ov ision for including land or w or k ing capit al

POP =Depreciable Fixed Capital Investment

After-tax Cash Flow

Pa y ou t Pe r iod w it h

I n t e r e st ( POPI )

•

Tak es int o account t he t im e v alue of

m oney ( discount ed) .

•

Equat ions:

•

Where:

– ( aft er t ax cash flow )_i = cash flow discount ed t o t im e zer o at int er est r at e i.

– ( fixed capit al invest .)_i = FCI com pounded t o t im e zer o at an int er est r at e i

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Ex a m ple ( ROI & POT)

• Pr oble m : A pr oposed chem ical plant w ill r equir e a

fixed- capit al invest m ent of $10 m illion. I t is est im at ed t hat t he w or king capit al w ill am ount t o 25 per cent of t he t ot al inv est m ent , and annual depr eciat ion cost s ar e est im at ed t o be 10 % of t he FCI . I f t he annual pr ofit w ill be $3 m illion, det er m ine t he st andar d % ROI and t he m inim um payback per iod.

• Solu t ion :

• Annual Pr ofit = $3.000.000

• Fixed capit al invest m ent = $10. 000.000

• Wor king Capit al = ( 25% ) ( $10. 000. 000) = $2.500. 000

• Rat e of Ret ur n on I nvest m ent =

2.000. 000/ ( 10.000.000+ 2.500.000) x 100% = 16%

Exam ple

…

.

• Pay out Tim e = depr eciable FCI / ( av g. pr ofit / y r + av g. depr eciat ion/ y r )

• Depr eciat ion = ( 10% ) ( 10.000.000) = $100.000

• Pay out Tim e =

( 10.000.000) / ( 3.000.000+ 100.000) = 3.23 year

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N e t Pr e se n t W or t h ( N PW )

• Ot her t er m s: Net Present Value ( NPV)

• The NPW is t he one m ost com panies use since it has none of t he disadv ant ages of ot her m et hods and t r eat s t he t im e v alue of m oney and it s effect on pr oj ect pr ofit abilit y pr oper ly

• The NPW is t he algebr aic sum of t he discount ed v alues of t he cash flow s each year dur ing t he life of pr oj ect

t im e Discount ing

S

ta

rt

-u

p

Com pounding

…

NPW

•

The Net Pr esent Wor t h ( NPW) is t he

differ ence bet w een t he pr esent w or t h of all

cash inflow and t he pr esent w or t h of all

invest m ent it em s:

•

Pr oj ect w it h high NPW w ill pr oduce a

great er fut ur e w or t h t o a com pany.

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Adv a n t a ge s a n d

D isa dv a n t a ge s of N PW

•

Adv a n t a ge s:

–

Tim ing of all cash flow s and capit al

r ecov er y at t he end of a pr oj ect ar e

consider ed

•

D isa dv a n t a ge s:

–

Capit al inv est m ent is hidden in t he

calculat ion and need t o be st at ed clear ly

in any r epor t of t he r esult s

N e t Pr e se n t W or t h I n de x

( N PW I )

•

Also know n as Pr ofit abilit y I ndex

•

The NPWI is t he r at io of t he pr esent

value of t he aft er - t ax cash inflow s t o

t he pr esent value of t he cash

out flow s or capit al it em s

•

NPWI > 1

Î

gr eat er t han discount

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I n t e r n a l Ra t e of Re t u r n

( I RR)

• I RR or DCFROR is t he int er est or discount r at e for w hich t he Net Pr esent Value of t he pr oj ect is equal t o zer o

• I RR is usually used for analyze t he pr oj ect in w hich t he r ev enue of t he pr oj ect is not unifor m y ear ly = = > cash flow

• I t is discount r at e t hat r esult s w hen t he NPW is equal t o zer o.

• Also know n as: DI SCOUNTED CASH FLOW RATE OF

RETURN ( DCFROR)

• The t echnique is sim ilar w it h NPW m et hod

• I RR is t he int er est r at e t hat w ill pr oduce an NPW of zer o.

D CFROR Ca lcu la t ion of A

Pr oj e ct

• DCFROR can be calculat ed fr om t he Cash Flow and Fixed Capit al I nvest m ent w hich for w ar d t o pr esent value:

• WC and Salvage Value ar e r ecover able

FCI WC = CASH FLOW P/A , i , n WC SV 1

1 i n

FCI WC = CASH FLOW 1 i n₋

1

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Lim it at ions of I RR Met hod

• M u lt iple r a t e s for r e t u r n : Unusual cash flow forecast s

can lead t o m ore t han one answ er for t he I RR

• Re in v e st m e n t Ra t e : I nherent in t he I RR calculat ion is t he

assum pt ion t hat funds receiv ed dur ing t he pr oj ect can im m ediat ely be reinvest ed at t he sam e int erest rat e as t he I RR. This is not alw ay s possible.

• Com pa r ison of t w o or m or e pr oj e ct s: When com paring

t w o or m ore m ut ually ex clusiv e proj ect s w ill not necessarily lead t o t he correct choice.

• Siz e of t h e in v e st m e n t : The I RR cannot different iat e

bet w een differ ences in t he size of t he invest m ent .

• Tim in g of ca sh flow s: Because of uncert aint y in forecast ,

t here is t he possibilit y t hat t he discount ed v alue of t he net cash flow s can equal t o zer o at m ore t han one int er est r at e.

N e t Ra t e of Re t u r n ( N RR)

•

Equat ion:

•

The cost of capit al has been t ak e car e of

in t he NPW calculat ion so t hat t he NRR is

t hen a t r ue net r et ur n r at e

NRR =

{

Net Present Worth

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Ca pit a liz e d Cost s

• Capit alized Cost ( K) is useful for com par ing alt er nat ives w hich exist as possible invest m ent choices w it hin a single ov er all pr oj ect .

• Capit alized cost r elat ed t o invest m ent r epr esent s t he am ount of m oney t hat m ust be available init ially t o pur chase t he equipm ent and sim ult aneously pr ov ide sufficient funds for int er est accum ulat ion t o per m it per pet ual r eplacem ent of t he equipm ent

Ca pit a liz e d cost ….

• Equat ion:

• K : capit alized cost

• C_v : or iginal cost of equipm ent

• C_R: r eplacem ent cost

• V_s : salv age v alue at end of est im at ed useful life

• n : useful life

• i : int er est r at e

• ( 1+ i)n _{/ ( ( 1+ i)}n_{- 1) = capit alized- cost fact or}

K = C_v CR 1+i n−1

= CR 1 +i

n

1 +in−1

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Pe r son a l Assign m e n t ( 1 w e e k )

• Pr oble m : Sebuah perusahaan ingin ber invest asi di bidang

pabrik k im ia. Berik ut ini adalah dat a- dat a unt uk analisis ekonom i:

– Fix ed Capit al I nv est m ent : $3,600,000

– Kapasit as pabr ik : 5,000,000 lb/ y ear

– Per iode Konst r uk si : 1 t ahun

– Land : $100,000

– Wor k ing Capit al : $300,000

– Pr oj ect life ( um ur pabr ik ) : 10 y ear s

– Depreciat ion: St raight - line m et hod

– Pot ent ial Sales: 4,000,000 lb/ y ear , dan m eningk at 10% t iap t ahun hingga ak hir pr oj ect

– Selling pr ice: &0.80/ lb dalam 2 t ahun per t am a set elah m asa k onst r uk si, dan m eningkat 5% per t ahun unt uk t ahun- t ahun ber ik ut ny a

– Cash oper at ing ex penses: $0.25/ lb pada t ahun per t am a set elah m asa konst r uk si dan m eningkat 3% per t ahun unt uk t ahun- t ahun ber ikut nya.

– I ncom e t ax r at e : 35%

La n j u t a n Tu ga s

• Soal/ Per t anyaan:

– Buat lah Cum m ulat ive Cash Flow unt uk Pr oj ect di at as m ulai t ahun k e- 0 ( m asa k onst r uk si) hingga akhir pr oj ect .

– Hit unglah Pay out Tim e ( dalam t ahun)

– Hit unglah Rat e of Ret ur n on I nvest m ent ( ROI )