capital budgeting and cash flow principle1

CAPITAL BUDGETING AND CASH FLOW PRINCIPLES

Capital Budgeting: Proses evaluasi dan seleksi investasi jangka panjang yang sesuai dengan tujuan perusahaan (maksimisasi kemakmuran pemilik).

Capital Expenditure: Pengeluaran dana oleh perusahaan yang diharapkan untukExpenditure memperoleh manfaat dalam jangka panjang Current Expenditure: Pengeluaran dana oleh perusahaan yang diharapkan untuk memperoleh manfaat dalam jangka waktu satu tahunExpansionReplacementRenewalOther PurposesBasic terminology: Independent Versus Mutually Exclusive Projects Unlimited Funds Versus Limited Funds Accept – Reject Versus Ranking Approaches Conventional Versus Nonconventional Cash Flow Patterns Annuity Versus Mixed Stream Cash Flows

#Relevant Cash Flows#Initial Investment

Cash Flows Proyek Net Operating Cash Inflows Terminal Cash FlowTerminal Cash Flow 5.000

Net Operating Cash Inflows

700 1.000 1.400 2.000 2.100 0

1 2 3 4 5Initial Investment10.000

Initial Investment for Replacement.

Cost of new assets+ Installation costs- Proceeds from sale of old assets

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-/+ Taxes on sale of old assets-/+ Change in net working capital-----------------------------------------

Initial Investment

Net Operating Cash Inflows.

Revenue- Expenses (excluding depreciation) ------------------------------------------ Profits before depreciation & taxes- Depreciation ------------------------------------------- Profits before taxes- Taxes ------------------------------------------- Net Profits after taxes+ Depreciation ------------------------------- Net Operating Cash Inflows

Terminal Cash Flow.

Proceeds from sale of new asset- Proceeds from sale of old asset-/+ Taxes on sale of new assets-/+ Taxes on sale of old assets-/+ Change in net working capital---------------------------------------------

Terminal Cash Flow

# Capital Budgeting Techniques#

Payback Period Net Present Value Internal Rate of Return

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POLA ALIRAN KASTYPE SIGN ON NET CASH FLOW NUMBER OF

0 1 2 3 4 5 6 SIGN CHANGEConventional - + + + + + + 1Conventional - - - + + + + 1Conventional + + + + + - - 1

Non Conventional - + + + - - - 2Non Conventional + + - - - + + 2Non Conventional - + - - + + + 3

Contoh:

I. Proyek Expansi.

Suatu perusahaan Otobus membeli bus eksekutif baru dengan harga Rp 1.000.000.000,00 melayani penumpang antar propinsi dan bus diperkirakan berumur ekonomis 10 tahun. Biaya surat-surat Rp 5.000.000,00 dan modal kerja yang harus disediakan diperkirakan Rp 5.000.000,00. Estimasi pendapatan per tahun Rp 300.000.000,00. Biaya per tahun (Operasi dan pemeliharaan) Rp 50.000.000,00. Bus pada akhir umur ekonomis dapat dijual dengan harga Rp 50.000.000,00. Pajak 10 %.

Dari data tersebut dapat dihitung Initial Investmentnya:

Initial Investment.Harga pembelian bus Rp 1.000.000.000,00Biaya surat-surat Rp 5.000.000,00Modal kerja Rp 5.000.000,00Initial Investment Rp 1.010.000.000,00

Net Operating Cash InflowPendapatan Rp 300.000.000,00Biaya Operasi Rp 50.000.000,00Biaya depresiasi Rp 100.000.000,00Laba Operasi Rp 150.000.000,00Bunga 0,00Laba Sebelum Pajak (EBT) Rp 150.000.000,00Pajak 10 % Rp 15.000.000,00Laba Setelah Pajak Rp 135.000.000,00Depresiasi Rp 100.000.000,00Net Operating Cash Inflow (Proceeds) Rp 235.000.000,00

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Terminal Cash Flow.Hasil Penjualan Bus Rp 50.000.000,00Pajak Penjualan 10 % Rp 5.000.000,00Net Cash Flow Rp 45.000.000,00

Rp 45.000.000,00 Annuity = Rp 235.000.000,00

1 2 3 4 5 6 7 8 9 10Rp 1.010.000.000,00

II. Proyek Penggantian.

Perusahaan XYZ sedang mempertimbangkan untuk mengganti mesin lama dengan mesin baru.

Harga beli mesin baru Rp 380.000,00Biaya instalasi mesin Rp 20.000,00Umur ekonomis 5 tahun

Harga beli mesin lama 3 tahun yang lalu Rp 240.000,00Harga jual mesin lama saat ini Rp 280.000,00Umur ekonomis 5 tahun

Dengan penggantian ini, perusahaan mengestimasi akan terjadi kenaikan asset lancar sebesar Rp 35.000,00 dan kewajiban lancar Rp 18.000,00Pajak 10 %

Initial InvestmentHarga beli mesin baru Rp 380.000,00Biaya instalasi mesin Rp 20.000,00Proceeds penjualan mesin lama Rp 280.000,00Pajak penjualan mesin lama *) Rp 18.400,00Perubahan modal kerja bersih Rp 17.000,00Initial Investment Rp 155.400,00Ket:

*) Nilai buku mesin lama 240.000 – 144.000 = Rp 96.000,00Pajak 10% (280.000 – 96.000) = Rp 18.400,00

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Net Operating Cash Inflow.

Selanjutnya diketahui bahwa estimasi pendapatan dan biaya per tahun diluar depresiasi untuk kedua mesin selama 5 tahun sebagai berikut:

MESIN BARU MESIN LAMATAHUN PENDAPATAN BIAYA PENDAPATAN BIAYA

1 Rp 2.520,00 Rp 2.300,00 Rp 2.200,00 Rp 1.990,002 Rp 2.520,00 Rp 2.300,00 Rp 2.300,00 Rp 2.110,003 Rp 2.520,00 Rp 2.300,00 Rp 2.400,00 Rp 2.230,004 Rp 2.520,00 Rp 2.300,00 Rp 2.400,00 Rp 2.250,005 Rp 2.520,00 Rp 2.300,00 Rp 2.250,00 Rp 2.120,00

MESIN BARU LABA SEBELUM

DEP. & PAJAK

DEPRESIASI

N O C I FTH PENDAPATAN BIAYA EBIT PAJAK

10%

1 Rp 2.520,00 Rp 2.300,00 Rp 220,00 Rp 80,00 Rp 140,00 Rp 14,00 Rp 206,002 Rp 2.520,00 Rp 2.300,00 Rp 220,00 Rp 80,00 Rp 140,00 Rp 14,00 Rp 206,003 Rp 2.520,00 Rp 2.300,00 Rp 220,00 Rp 80,00 Rp 140,00 Rp 14,00 Rp 206,004 Rp 2.520,00 Rp 2.300,00 Rp 220,00 Rp 80,00 Rp 140,00 Rp 14,00 Rp 206,005 Rp 2.520,00 Rp 2.300,00 Rp 220,00 Rp 80,00 Rp 140,00 Rp 14,00 Rp 206,00

MESIN LAMATH PENDAPATAN BIAYA1 Rp 2.200,00 Rp 1.990,00 Rp 210,00 Rp 48,00 Rp 162,00 Rp 16,20 Rp 193,802 Rp 2.300,00 Rp 2.110,00 Rp 190,00 Rp 48,00 Rp 142,00 Rp 14,20 Rp 175,803 Rp 2.400,00 Rp 2.230,00 Rp 170,00 Rp 0,00 Rp 170,00 Rp 17,00 Rp 153,004 Rp 2.400,00 Rp 2.250,00 Rp 150,00 Rp 0,00 Rp 150,00 Rp 15,00 Rp 135,005 Rp 2.250,00 Rp 2.120,00 Rp 130,00 Rp 0,00 Rp 130,00 Rp 13,00 Rp 117,00

NO C I F RELEVANT CASH FLOWTH MESIN BARU MESIN LAMA1 Rp 206,00 Rp 193,80 Rp 12,202 Rp 206,00 Rp 175,80 Rp 30,203 Rp 206,00 Rp 153,00 Rp 53,004 Rp 206,00 Rp 135,00 Rp 71,005 Rp 206,00 Rp 117,00 Rp 89,00

TERMINAL CASH FLOW.

Jika diketahui bahwa mesin yang baru laku dijual Rp 50.000,00 dan perusahaan berharap akan menutup modal kerja bersih Rp 17.000,00, maka aliran kas akhir umur proyek.

Penjualan mesin baru Rp 50.000,00Pajak penjualan mesin baru Rp 5.000,00Perubahan modal kerja bersih Rp 17.000,00Terminal Net Cash In Flow Rp 23.000,00

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CAPITAL BUDGETING TECHNIQUES

Capital Budgeting Techniques.

A number of techniques used to analyze the relevant cash flows to asses whether a project is acceptable or to rank projects.

1. Payback period (PP)

Payback period is the exact amount of time required for a firm to recover its initial investment as calculated from cash inflows.

In the case of annuity, Payback period = In the case of mixed Stream, Payback Period must be accumulated until

the Initial Investment is recovered

Example.

Capital expenditure data for Barnet Company.

ProjectA B

Initial Investment $ 42,000.00 $ 45,000.00Year

1 $ 14,000.00 $ 28,000.002 $ 14,000.00 $ 12,000.003 $ 14,000.00 $ 10,000.004 $ 14,000.00 $ 10,000.005 $ 14,000.00 $ 10,000.00

Average $ 14,000.00 $ 14,000.00

Project A has annual cash inflows.Payback period = = = 3 years

Project B has mixed stream cash inflowsB

$ 45,000.00Accumulated Cash inflows

$ 28,000.00 $ 28,000.00$ 12,000.00 $ 40,000.00$ 10,000.00 $ 50,000.00$ 10,000.00$ 10,000.00

At the end of year 3, $ 50,000.00 will be recovered. Since the amount received by the end of year 3 is greater than the initial investment of $ 45,000.00, the

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payback period is somewhere between two and three years. It is only $ 5,000.00 must be recovered during year 3. So, it needs 50 percent of $ 10,000.00 to complete the payback of initial investment. Therefore paybeck period for project B is 2.5 years

2. Net Present Value (NPV)

Net Present Value discounts the firm’s cash flows at a specified rate called discount rate/opportunity rate/cost of capital/.

NPV = Present Value of Cash Inflows – initial Investment

NPV = – Initial Investment

NPV calculation for Project AAnnual cash inflows $ 14,000.00PVIFA, 10%, 5 years 3.791PV of cash inflows $ 53,074.00Initial Investment $ 42,000.00NPV $ 11,074.00

NPV calculation for Project BYear Cash Inflows PVIF, 10%, 5 Years PV

1 $ 28,000.00 0.909 $ 25,4522 $ 12,000.00 0.826 9,9123 $ 10,000.00 0.751 7,5104 $ 10,000.00 0.683 6,8305 $ 10,000.00 0.621 6,210

PV of cash inflows $ 55,914Initial Investment $ 45,000

NPV $ 10,914

3. Internal Rate of Return (IRR)

IRR is the discount rate that equates the PV of cash inflows with initial investment associated with a project, thereby causing NPV = 0

0 = – Initial Investment OR = Initial Investment

IRR = k1 + (k2 – k1)

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Example.

Capital expenditure data for Barnet Company.

ProjectA B

Initial Investment $ 42,000.00 $ 45,000.00Year

1 $ 14,000.00 $ 28,000.002 $ 14,000.00 $ 12,000.003 $ 14,000.00 $ 10,000.004 $ 14,000.00 $ 10,000.005 $ 14,000.00 $ 10,000.00

Average $ 14,000.00 $ 14,000.00

In the case of annuity

Project A k1 = 18% k2 = 20%1 $14,000.00 11864.40678 $11,666.67 2 $14,000.00 10054.58202 $9,722.22 3 $14,000.00 8520.832218 $8,101.85 4 $14,000.00 7221.044252 $6,751.54 5 $14,000.00 6119.529027 $5,626.29

PV of cash inflows 43780.39429 41868.56996Initial Investment 42,000 42,000

NPV 1,780 -131

IRR = k1 + (k2 – k1)

IRR = 18% + (20% – 18%)

IRR = 19,8%

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IRR = k1 + (k2 – k1)IRR = 18% + (22% – 18%)IRR = 21,6%

Comparing NPV and IRR Techniques.

For conventional projects, NPV and IRR will always generate the same accept-reject decision. The differences in their assumptions cause them to rank projects differently.

1. NPV Profiles

Projects can be compared graphically by constructing NPV profiles.

Example.

Discount Rate NPVA B

0% $ 28,000.00 $ 25,000.0010% 11,074.00 10,914.0020% 0 129522% -131 0

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Project B k1 = 18% k2 = 22%1 $28,000.00 23728.81356 22950.819672 $12,000.00 8618.213157 8062.3488313 $10,000.00 6086.308727 5507.0688744 $10,000.00 5157.888752 4513.990885 $10,000.00 4371.092162 3699.992525

PV of cash inflows 47962.31636 44734.22078Initial Investment 45,000 45,000

NPV 2,962 -266

Conflicting Rankings.

Conflicting rankings dengan menggunakan NPV dan IRR karena: The magnitude of cash flows Timing of cas flows

Asumsi implicit: reinvestment of intermediate ash inflows (cash inflows received prior of intermediate cash inflows).

NPV: the intermediate cash inflows are reinvested at the cost of capitalIRR : the intermediate cash inflows are reinvested at the rate equal to the project’s IRR

Project with similar sized investment.

Discount RateCASH INFLOW PATTERN

Lower Early Year Cash Inflows

Higher Early Year Cash Inflows

Low Preferred Not PreferredHigh Not Preferred Preferred

Which One Is Better?

Theoritical View.NPV is better approach to capital budgeting. NPV assumes that the intermediate cash inflows are reinvested at the cost of capital (reasonable estimate) than IRR at the rate equal to the project’s IRR.

Practical View

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Financial managers prefer to use IRR. The business manager prefers to use rate of return rather than actual dollar returns. Interest rate and profitability expressed as annual return.

Approaches For Dealing With Risk.

Up to this point assume that all project’ cash inflows have the same level of risk. Actually each project’ cash inflows has its risk.

Risk and Cash Inflows.

Risk refers to the chance that the project will prove unacceptable (NPV < 0 and IRR < CoC).

Risk in capital budgeting stems from CASH INFLOWS (uncertainty), while initial investment is known with relative certainty. All components in cash inflows (sales, CGS, operating expenses) are uncertain.

Analyst has to evaluate the probability that the cash inflows will be large enough to provide for project acceptance.

Exp.Tyre company has 2 mutually exclusive projects (A and B). Each requires $ 10,000 initial investment (II) and provides equal annual CIF over 15 years lives.

NPV = CIF * (PVIFAk,n) – Initial Investment > 0

k =10%, n = 15 years, II = $ 10,000, the breakeven cash inflows (minimum level of cash inflows) necessary for projects to be acceptable:

NPV = CIF * (PVIFAk,n) – Initial Investment > 0 CIF * (PVIFA10%,15) – 10,000 > 0 CIF * (7.606) – 10,000 > 0

CIF > = $ 1,315

Assume that the analysis results as follows: Probability of CIFA > $1,315 100% Probability of CIFB > $1,315 60%

Project A less risky than project B.

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capital budgeting and cash flow principle1

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