Operational Expenditure
7.6 Project Feasibility Analysis
The financial feasibility calculations were carried out using the Net Present Value (NPV), Profitability Index (PI), Internal Rate of Return (IRR), and Payback Period (PBP) investment feasibility criteria in the financial model built. The financial feasibility analysis uses a Weighted Average Cost of Capital (WACC) value that has been set at 6.51% (based on ORI risk free rate data). The projections made on the profit (loss) statement and balance sheet are translated in the form of Free Cash Flow to the Firm (FCFF).
The Free Cash Flow projection of this project shows a significant positive value at the beginning of project implementation. Meanwhile, the present value cash flow with a discount rate of 6.51% (based on ORI risk free rate data) still shows a positive value. Based on the results of the Free Cash Flow projection calculation, the calculation of Net Present Value (NPV), Financial Internal Rate of Return (IRR), Profitability Index (PI), and Payback Period (PBP) are as follows. are as follows.
7.6.1 Net Present Value (NPV)
Net present value (NPV) is obtained by subtracting the present value of money from the project's income by the initial investment. project with the initial investment. The following is the formula for NPV.
NPV = Present value of money from project income - initial investment
Corresponding variable explanation:
NPV: Net Present Value CFt: Cash Flow in year t r: Discount rate
CF0: Cash Flow at year 0 (Initial investment)
Decision criteria:
● If the NPV is greater than 0, the project is acceptable.
● If the NPV is less than 0, the project is rejected.
Based on the calculation results, the NPV of the project is obtained:
Rp 1,216,790,115.83
Hence, it can be concluded that the project is feasible with a projection of quantity sold in year 1 of 31,920 units, year 2 of 35,112 units, and the 3rd year and so on amounted to 508,723 and the price per unit that has been set at Rp. 15,000/unit for Crisp Green Detox and Carrot Zing Boost, and Rp 18,000 for Tropical Berry Bliss, Citrus Berry Burst, and Mango Avocado Smoothie, then increased by 4.23%/year based on Inflation.
7.6.2 Financial Internal Rate of Return (IRR)
The Financial Internal Rate of Return (IRR) is the discount factor that makes the NPV equal to 0 (because the present value of money from project income is equal to the initial investment). IRR shows the rate of return that will be obtained if the company invests in a particular project. investment in a particular project. Here is the formula of IRR:
Description:
CFt: Cash Flow in year t
CF0 : Cash Flow in year 0 (Initial investment) IRR : Discount interest rate when NPV = 0
Decision criteria:
● If the IRR is greater than the cost of capital, the project is acceptable.
● If the IRR is less than the cost of capital, the project is rejected.
Based on the calculation results, it is found that the project FIRR is equal to 37.8%
The Internal Rate Return (IRR) value of 37.8% is greater than the Weighted Average Cost of Capital 6.51%, which strengthens the conclusion that the project is feasible.
7.6.3 Payback Period
The Payback Period method illustrates the time required for the company to return the initial capital spent (calculated based on cash flow).
Decision criteria:
● If the payback period is less than the maximum time specified, the project is acceptable.
● If the payback period is more than the maximum time specified, the project is rejected.
In this analysis, the Payback Period approach is used. With all of the assumptions stated, the Payback Period value is 3.32 years. The payback period is far less than the maximum time set for 10 years. This certainly reinforces that the project is feasible.
7.6.4 Profitability Index
Profitability Index (PI) is a method of calculating project feasibility by comparing the sum of the present value of the cash flow value with the investment value of the project. The following is the formula of Profitability Index (PI):
Description:
CFt: Cash Flow in year t
CF0 : Cash Flow in year 0 (Initial investment) r : Discount interest rate
Based on the calculation results, the project PI is obtained:
4.00
The PI value above 1 indicates that this project is feasible with a projection of quantity sold in year 1 of 31,920 units, year 2 of 35,112 units, and the 3rd year and so on amounted to 508,723 and the price per unit that has been set at Rp. 15,000/unit for Crisp Green Detox and Carrot Zing Boost, and Rp 18,000 for Tropical Berry Bliss, Citrus Berry Burst, and Mango Avocado Smoothie, then increased by 4.23%/year based on Inflation.
This method calculates the comparison between the value of future net cash flows and the value of the current investment. The Profitability Index must be greater than 1 to be considered feasible. The greater the PI, the more viable the investment. This model calculates the cash value of net cash inflows divided by the cash value of the investment.
Decision criteria:
● If the value is greater than 1, the investment project is acceptable.
● If the value is less than 1, the investment project is not acceptable.
In this analysis, the profitability index value of 4.00 is far greater than 1, so the investment project is considered feasible.
7.6.5 Sensitivity Analysis
Sensitivity analysis is the method to determine the change in Payback Period, Profitability Index, Net Present Value, and Internal Rate of Return, when there is a change in some variables. In this project, the variables change are price, unit sales, and COGS. Below is the sensitivity analysis visualization presented in table.
Several snapshots of insight:
From the table, there are some variable changes such as price, unit sold, and COGS.
In scenario 1, if the price drops 75% from original price, the net present value of the firm will be negative. It will be Rp (229,946,681). Moreover the payback period becomes unidentified (suggesting it may be recovered more than the 10-year timeframe), profitability index with 0,41, and also -3.5% on internal rate of return. Therefore, the company can not sell their products with 75% discounts. The same case also applies to the decrease in unit sales by 75%.
On the other hand, the firm could still lower the price up to 80% to gain the project’s acceptance. With a payback period below 10-year (~7.81 years), Profitability Index 1.15 (above 1), NPV Rp 59,400,839 (more than 0) and IRR 8.63%, suggesting all of the criteria of project feasibility being met greatly. This suggests the firm’s management to being more cautious in executing the operations of the project since every change in circumstances will have an effect on the project’s profitability and attractiveness.
7.6.6 Conclusion and Suggestion
Based on the results of the financial study, the Alfa Smoothie Investment Project is feasible to run with the following values:
-Net Present Value (NPV) equals Rp 1,216,790,115.83,-.
-Internal Rate Return (IRR) value of 37.8%, greater than the WACC of 6.51%
- Payback Period of 3.32 years, payback period is less than the maximum time set, the project is acceptable.
- The Profitability Index value of 4 is greater than 1, so the investment project is considered feasible.