Pemilihan Investasi Terbaik Pertemuan 19 dan 20 Matakuliah: D 0094 Ekonomi Teknik Tahun: 2007

Bina Nusantara Pendahuluan Dalam mengevaluasi proyek, di pokok bahasan yang lalu hanya satu metode ekonomi teknik yang perlu digunakan karena metode berbeda akan memberikan hasil yang sama. Bagaimana cara memilih metode yang digunakan (bila tidak diberikan oleh soal/bila didunia kerja) adalah dengan menggunakan tabel berikut ini:

Bina Nusantara Comparing Mutually Exclusive Alternatives Evaluation Period Type of Alternatives Recommended Method Series to evaluate Equal lives of alternatives Revenue or service Public Sector AW or PW B/C based on AW or PW Cash Flow Incremental Cash Flow Unequal lives of alternatives Revenue or service Public Sector AW B/C based on AW Cash Flow Incremental Cash Flow Study periodRevenue or service Public Sector AW or PW B/C based on AW or PW Updated Cash Flow Updated Incremental Cash Flow Long to infiniteRevenue or service Public Sector AW or PW B/C based on AW Cash Flow Incremental Cash Flow

Bina Nusantara Memilih Proyek Setelah melakukan pemilihan metode, selanjutnya dilakukan pemilihan Rate of Return, atau interest rate berdasarkan metode evaluasi (seperti dalam tabel berikut ini) Setelah itu dapat dipilih investasi terbaik. Disini kita akan kembali bertemu dengan MARR (Minimum Attractive Rate of Return) sebagai alternative Rate of Return yang digunakan. MARR sendiri disini kita anggap sebagai hurdle rate, ambang batas, agar kita memperoleh keuntungan.

Evaluation Method Equivalence Relation Lives of Alternatives Time Periods for Analysis Series to Evaluate Rate of Return; Interest Rate Decision Guideline: Select* Present Worth PWEqualLivesCash flowMARR Numerically largest PW PWUnequalLCMCash flowMARR Numerically largest PW PWStudy period Updated cash flow MARR Numerically largest PW CCLong to infinite InfinityCash flowMARR Numerically largest CC Future Worth FWSame as present worth for equal lives, unequal lives, and study period Numerically largest FW Annual Worth AWEqual Or unequal LivesCash flowMARR Numerically largest AW AWStudy period Updated cash flow MARR Numerically largest AW AWLong to infinite InfinityCash flowMARR Numerically largest AW * Lowest equivalent cost or largest equivalent income

Evaluation Method Equivalence Relation Lives of Alternatives Time Periods for Analysis Series to Evaluate Rate of Return; Interest Rate Decision Guideline: Select* Rate of Return PW or AWEqualLives Incremental cash flow Find i*Last i*> MARR PW or AWUnequalLCM of pair Incremental cash flow Find i*Last i*> MARR AWUnequalLives Cash flow Find i*Last i*> MARR PW or AWStudy period Updated Incremental cash flow Find i*Last i*> MARR Benefit / Cost PWEqual or Unequal LCM of pair Incremental cash flow Discount rate Last C > 1.0 AWEqual or Unequal Lives Incremental cash flow Discount rate Last C > 1.0 AW or PWLong to infinite Infinity Incremental cash flow Discount rate Last C > 1.0 * Lowest equivalent cost or largest equivalent income

Bina Nusantara Choice of MARR Or you can choose MARR based on: Choice of MARR when Project Financing is Known Choice of MARR when Project Financing is Unknown Choice of MARR under Capital Rationing

Choice of MARR when Project Financing is Known When you find the Net present worth of the project, use cost of equity (i e ) as the discount rate. Explicit accounts For debt flows

Choice of MARR when Project Financing is Unknown Without explicitly treating the debt flows, make a tax adjustment to the discount rate, using the weighted cost of capital k.

Bina Nusantara Choice of MARR as a Function of Budget ProjectAOAO Cash Flow A1IRR 1-$10,000$12,00020% 2-10,00011, ,00011, ,00010, ,00010, ,00010,4004 Borrowing rate (k) = 10% Lending rate (r) = 6%

Bina Nusantara An Investment Opportunity Schedule $20,000$40,000$60,000 20%15%10%8%7% 4% Project 1 Project 2 Project 3 Project 4 Project 5 Project 6 Required capital budget Rate of return (%)

Bina Nusantara A Choice of MARR under Capital Rationing $20,000$40,000$60,000 20%15%10%8% 7% 4% Project 1 Project 2 Project 3 Project 4 Project 5Project 6 Required capital budget Rate of return (%) k = 10% r = 6% MARR Borrowing rate (k) = 10% Lending rate (r) = 6%

Bina Nusantara Capital Budgeting Evaluation of Multiple Investment Alternatives –Independent projects –Dependent projects Capital Budgeting Decisions with Limited Budgets

Bina Nusantara Independent Projects AlternativeDescriptionXaXa XbXb 1Reject A, Reject B 00 2Accept A, Reject B 10 3Reject A, Accept B 01 4Accept A, Accept B 11

Bina Nusantara Mutually Exclusive Projects Alternative(X A1, X A2 )(X B1,X B2 ) 1(0,0) 2(1,0)(0,0) 3(0,1)(0,0) 4 (1,0) 5(0,0)(0,1) 6(1,0) 7(0,1)(1,0) 8 (0,1) 9

Bina Nusantara Contingent Projects AlternativeXAXA XBXB XCXC

Bina Nusantara Four Energy Saving Projects under Budget Constraints (Budget Limit = $250,000) ProjectInvestmentAnnual O&M Cost Annual Savings (Energy) Annual Savings (Dollars) IRR 1$46,800$1,200151,000 kWh$11, % 2104,8501,050513,077 kWh40, % 3135,4801,3506,700,000 CF32, % 494, ,962 kWh30, %

Bina Nusantara Marginal Cost of Capital Schedule (MCC) and Investment Opportunity Schedule (OSC)

Bina Nusantara Optimal Capital Budget

Infeasible alternatives Best Alt. jAlternativeRequired Budget Combined Annual Savings A1$(46,800$10,578 3A2(104,850)38,970 4A3(135,480)31,143 5A4(94,230)35,691 6A4, A1(141,030)46,269 7A2, A1(151,650)49,548 8A3, A1(182,280)41,721 9A4, A2(199,080)74,661 10A4, A3(229,710)66,834 11A2, A3(240,330)70,113 12A4, A2, A1(245,880)85,239 13A4, A3, A1(276,510)77,412 14A2, A3, A1(287,130)80,691 15A4, A2, A3(334,560)105,804 16A4, A2, A3, A1(381,360)116,382

Bina Nusantara Summary Methods of financing: 1. Equity financing uses retained earnings or funds raised from an issuance of stock to finance a capital. 2. Debt financing uses money raised through loans or by an issuance of bonds to finance a capital Investment. Companies do not simply borrow funds to finance projects. Well- managed firms usually establish a target capital structure and strive to maintain the debt ratio when individual projects are financed.

Bina Nusantara The selection of an appropriate MARR depends generally upon the cost of capital—the rate the firm must pay to various sources for the use of capital. 1. The cost of equity (i e ) is used when debt-financing methods and repayment schedules are known explicitly. 2. The cost of capital (k) is used when exact financing methods are unknown, but a firm keeps it capital structure on target. In this situation, a project’s after-tax cash flows contain no debt cash flows such as principal and interest payment Summary ( Cont )

Bina Nusantara The cost of the capital formula is a composite index reflecting the cost of funds raised from different sources. The formula is The marginal cost of capital is defined as the cost of obtaining another dollar of new capital. The marginal cost rises as more and more capital is raised during a given period.

Bina Nusantara Under conditions of capital rationing, the selection of MARR is more difficult, but generally the following possibilities exist : ConditionsMARR A firm borrows some capital from lending institutions at the borrowing rate, k, and some from its investment pool at the lending rate, r. r <MARR< k A firm borrows all capital from lending institutions at the borrowing rate, k. MARR = k A firm borrows all capital from its investment pool at the lending rate, r. MARR = r

Bina Nusantara The cost of capital used in the capital budgeting process is determined at the intersection of the IOS and MCC schedules. If the cost of capital at the intersection is used, then the firm will make correct accept/reject decisions, and its level of financing and investment will be optimal. This view assumes that the firm can invest and borrow at the rate where the two curves intersect.

Bina Nusantara If a strict budget is placed in a capital budgeting problem and no projects can be taken in part, all feasible investment decision scenarios need to be enumerated. Depending upon each investment scenario, the cost of capital will also likely change. Our task is to find the best investment scenario in light of a changing cost of capital environment. As the number of projects to consider increases, we may eventually resort to a more advanced technique, such as a mathematical programming procedure.