1

1. Profitability Analysis
1.1 Rate of Return (ROR)/Return of Investment (ROI)
Rate of Return (ROI) is the annual profit generated by one unit of capital
invested. The formula for calculating ROI is as follows

The numerator of ROI equation is the annual net profit (NP) and
denominator component is fixed capital investment (FC). From our economical
analysis of our product, we can insert our NP and FC into this equation which our
data that inserted into the equation is in the fifth year after tax cash flow.

The calculated ROI is about 33%. Thus it can be concluded that our PLA
plant will yield good enough profits. Based on this ROI our product will attract
some investors in good way.
1.2 Payback Period
Payback Period is the duration (in years) of an investment will be returned.
Here is the formula for calculating payback period taking into account the Time
Value of Money:

Payback period is very important factor based on the continuity of the

product in market. If the payback period is less than a predetermined period, or in
the range of 8-10 years the project is acceptable. If the payback period exceeds the
predetermined period, the project is rejected. We can see our product payback
period according to net profit profile by the time of production which shown in
Figure below.

Universitas Indonesia

Rp5,000,000
Rp4,000,000
Cumulative Cash Flow

Thousand

Rp3,000,000
Rp2,000,000
Rp1,000,000

Payback Period

Rp0

-Rp1,000,000

8
10
Beginning of year

12

14

16

-Rp2,000,000
Figure 3.1 Payback Period Curves Based on Cumulative Cash Flow
(source : own calculation)

Based on this cumulative cash flow above, we know that our products payback
period is 5 years. This payback period time is acceptable because it is less than
predetermined period.

1.3 Minimum Attractive Rate of Return (MARR)

MARR value has same number to the WACC (Weighted Average Cost of
Capital). WACC itself means a calculation of a firm's cost of capital in which
each category of capital is proportionately weighted. Before we calculated the
WACC value, we have to decided the percentage of our source of capital cost.
Our plant percentage of source of capital cost is 30% from bank and 70%
from investor. We decided that bank percentage is lower than investor percentage
because the rules of bank explained that they would not invest their money to the
risker investment place like new product investment. After that, we must search
the data about bank interest rate and investor interest rate.
Based on BCA, BCA has bank interest rate value about 11.25%. Based on
benchmarking with similar to our product, the investor interest rate is about 12%.
Afetr that, we can calculate the WACC value with formula :
(

)
(

Universitas Indonesia

Because WACC = MARR, so our MARR value is 11.70%. Again, based

on BCA, BCA has interest rate of deposit about 8%, so if we related this value to
our MARR value, our MARR value has bigger percentage (11.78% > 8%). Based
on this relation, we can conclude that if the investor give their money to our plant
investment, they have more profit rather than save their money into the bank.

1.4 Internal Rate of Return

IRR is the interest rate that can be received if the project is breakeven. Or
in other words, IRR is the rate of interest when NPV = 0. Generally speaking, the
higher a project's internal rate of return, the more desirable it is to undertake the
project. IRR can be calculated with:

Using MS. Excel, our IRR value is determined with 19 %. Which is quite large
but attractive enough for IRR. If we related to the value of Minimum Attractive
Rate of Return (MARR), our IRR value has bigger percentage (19%>11.78%).
Based on this relation, we can conclude that our product investment has profitable
value.
1.5 Net Present Value (NPV)
Net Present Value (NPV) shows the net benefits received by a project over
the life of the project at a certain interest rate. NPV can also be interpreted as the
present value of the cash flows generated by the investment. In calculating the
NPV is necessary to determine the relevant interest rate. In this calculation, the
interest rate used is the interest rate on the bank loan for start-up capital,
amounting to 10%. A project as feasible if the NPV> 0, which means the project
is profitable or provide benefits if implemented. If NPV <0, the project is not
eligible to run because it does not generate profit.
Cash flow in year n drawn into present value with a reasonable interest rate
by using the following formula:

Universitas Indonesia

Profit values obtained can be seen from Table in the appendices. After
pulling the value of profit each year to present value, all the values are summed
and the profit rate of 11.70% MARR obtained NPV of Rp1.024.132.380.053,00
Because our project result the NPV>0 and if related our NPV to our CAPEX
value, our NPV value has bigger number (Rp1trillion > Rp822billion), so we can
conclude that our product has good enough profitabiliy.
1.6 Break Even Point (BEP)
According to bussinessdictionary.com, Break Even Point (BEP) is the
point in time (or in number of units sold) when forecasted revenue exactly equals
the estimated total costs; where loss ends and profit begins to accumulate. This is
the point at which a business, product, or project becomes financially viable. Also,
the BEP value is the representative of payback period (our payback period is four
years).
Our lifetime production is 15 years and in each year we produce the value
of production capacity based on table below.
Percentage of PLA Production Capacity

Year

Percentage of Production
Capacity (%)

30

50

70

90

100

100

100

100

100

10

100

11

100

12

100

13

100

Universitas Indonesia

14

100

15

100

(source : Reproduce from brainstorming)

We decided thare are no declining value of production capacity because

the demand of similar product is still has significant amount and our product just
fulfilled about 2.5% from the differences between supply and demand value of
similar product (it is not the significant amount). Our product capacity itself has
amount of 5000 ton/year, so at the two plus months (third) year production
capacity is our BEP value which is :
Calculation of BEP Value

Year

Production
Capacity (ton)

1500

2500

3500

Total

7500

(source : Reproduce from brainstorming)

Based on calculation above, if we sell our product in number 7500 ton, we

can get the Break Even Point (BEP) of our product selling.

Universitas Indonesia