Long-Term Investment Decisions. 1. Capital Budgeting Cash Flows 2. Capital Budgeting Techniques 3. Risk and Refinements in Capital Budgeting

Transkripsi

1 Long-Term Investment Decisions 1. Capital Budgeting Cash Flows 2. Capital Budgeting Techniques 3. Risk and Refinements in Capital Budgeting

2 Gitman & Zutter (2012:390): Capital Budgeting is the process of evaluating and selecting long-term investments that are consistent with the firm s goal of maximazing owners wealth. Brigham & Houston (2007: 358): Capital budgeting is process of planning capital expenditures on assets whose cash flows are expected to extend beyond one year.

3 Capital expenditure vs Operating expenditure Capital Expenditure is an outlay of funds by the firm that is expected to produce benefits over a period of time greater than 1 year. Operating Expenditure is an outlay of funds by the firm resulting in benefits received within 1 year. Not all capital expenditures are made for fixed assets. An expenditure made for an advertising campaign may have long-term benefits.

4 The primary motives for making capital expenditures include: Gitman. Expansion increasing the productive capacity of the firm, usually through the acquisition of fixed assets. Replacement replacing existing assets with new or more advanced assets that provide the same function. Renewal rebuilding or overhauling existing assets to improve efficiency. Other motives include expenditures for nontangible projects that improve a firm s profitability, such as advertising, research and development, and product development. A firm may also be required by law to undertake pollution control and similar projects.

5 Brigham & Houston (2007: 359) Project classifications: 1. Replacement : needed to continue current operations 2. Replacement: cost reduction 3. Expansion of existing products or markets 4. Expansion into new products or markets 5. Safety and/or enviromental projects 6. Other

6 Capital Budgeting Cash Flows Management need to understand which cash flows are relevant in making decisions about proposals..

7 The Capital Budgeting Process Gitman & Zutter (2012:390) 1. Proposal generation 2. Review and analysis 3. Decision making 4. Implementation 5. Follow-up

8 Basic Terminology: 1. Independent vs Mutually exclusive projects 2. Unlimited funds vs Capital rationing 3. Accept-Reject vs Ranking Approaches

9 Independent versus Mutually Exclusive Investments Mutually Exclusive Projectsare investments that compete in some way for a company s resources. A firm can select one or another but not both. Independent Projects, on the other hand, do not compete with the firm s resources. A company can select one, or the other, or both --so long as they meet minimum profitability thresholds.

10 Unlimited Funds Versus Capital Rationing Firms under capital rationing have only a fixed amount of dollars available for the capital budget, whereas a firm with unlimited funds may accept all projects with a specified rate of return. If the firm has unlimited fundsfor making investments, then all independent projectsthat provide returns greater than some specified level can be accepted and implemented.

11 Accept-rejectversus ranking approaches: The accept-reject approachinvolves evaluating capital expenditure proposals to determine whether they meet the firm s minimum acceptance criterion. The ranking approach, involves ranking projects on the basis of some predetermined measure, such as rate of return.

12 The Pattern of Cash Flows Most projects have a conventionalpattern of cash flows (-,+,+,+,+,+,+). Some may have unconventional cash flows (-,-,+,+,-,+,-,+). For projects with unconventional cash flows, we may have the problem of multiple IRRs.

13 Categories of Cash Flows: Initial Cash Flowsare cash flows resulting initially from the project. These are typically net negative outflows. Operating/Operational Cash Flowsare the cash flows generated by the project during its operation. These cash flows typically net positive cash flows. Terminal Cash Flowsresult from the disposition of the project. These are typically positive net cash flows.

14 Initial cashflow: aliran kas yang berhubungan dengan pengeluaran-pengeluaran kas untuk keperluan investasi. Termasuk dalam initial cashflow adalah kebutuhan dana yang digunakan untuk modal kerja. Operational cashflow:aliran kas yang akan digunakan untuk menutup investasi, yang diterima setiap tahun selama umur investasi, dan berupa aliran kas bersih. Terminal cashflow: aliran kas yang diterima pada akhir umur investasi. Dapat berupa nilai residu (taksiran nilai jual aktiva tetap pada akhir umur investasi) dan modal kerja.

15 Data & Information Requirements External Economic & Political Data Business Cycle Stages Inflation Trends Interest Rate Trends Exchange Rate Trends Freedom of Cross-Border Currency Flows Political Stability Regulations Taxation

16 Internal Financial Data Initial Outlay & Working Capital Estimated Cash Flows Financing Costs Transportation, Shipping and Installation Costs Competitor Information

17 Non-Financial Data Distribution Channels Labor Force Information Labor-Management Relations Status of Technological Change in the Industry Competitive Analysis of the Industry Potential Competitive Reactions

18 Irrelevant Cash Flows Sunk Costsare not relevant to the analysis because these costs are not dependent on whether or not the project is undertaken. One examplewould be to include the cost of land already purchased as part of the decision as to how to develop it. Financing costsare not relevant to the determination of cash flows only because they are already accounted for through the discounting process.

19 Finding the Initial Investment: a. The cost of the new assetis the purchase price. (Outflow) b. Installation costsare any added costs necessary to get an asset into operation. (Outflow) c. Proceeds from sale of old assetare cash inflows resulting from the sale of an existing asset, reduced by any removal costs. (Inflow) d. Tax on sale of old assetis incurred when the replaced asset is sold due to recaptured depreciation, capital gain, or capital loss. (May be an inflow or an outflow) e. The change in net working capitalis the difference between the change in current assets and the change in current liabilities. (May be an inflow or an outflow)

20 Change in Net Working Capital: Net working capital is the amount by which a firm s current assets exceed its current liabilities. Change in net working capital is the difference Change in net working capital is the difference between the change in current assets and the change in current liabilities.

21 Cash Flow from Operations: Profit After-tax + Depreciation + Interest ( 1-tax rate)

22 Exp 8.6: A project generates revenues of $ 1,000, cash expenses of $ 600, and depreciation charges of $ 200 in particular year. Tax rate 35%.

23 Income Statement Revenues $ 1,000 Cash expenses 600 Depreciation expenses 200 Profit before tax 200 Tax at 35% 70 Net profit 130

24 Penentuan Operational cashflow dengan berbagai sumber pendanaan Suatu investasi membutuhkan dana sebesar Rp ,00 yang akan didanai oleh modal sendiri, dengan umur investasi 4 tahun, beban tunai Rp ,00 per tahun dan pajak 25%. Depresiasi dengan metode garis lurus dan pendapatan per tahun Rp ,00.

25 Laporan Rugi Laba Pendapatan Rp ,00 Beban tunai Rp ,00 Depresiasi Rp ,00 Laba sebelum pajak Rp ,00 Pajak Rp ,00 Laba setelah pajak Rp ,00

26 Jika investasi tersebut akan didanai oleh modal pinjaman dengan tingkat bunga 15% per tahun. Laporan Rugi Laba sbb: Pendapatan Rp ,00 Beban tunai Rp ,00 Depresiasi Rp ,00 Laba sebelum bunga dan pajak Rp ,00 Bunga Rp ,00 Laba sebelum pajak Rp ,00 Pajak Rp ,00 Laba setelah pajak Rp ,00

27 Depreciation

28 Some Complexities Inflation is typically adjusted for in the cash flow component of the calculation Taxesare typically adjusted for in the cash flow calculation, yielding net after-tax cash flows Risk is typically adjusted for in the discount rate portion of the calculation

29 Penentuan Arus Kas PT ABC menerima tawaran dari PT X yang ingin membeli produknya dan dituangkan dalam kontrak selama 4 tahun, yaitu mulai Jumlah produk yang akan dibeli sebanyak unit per tahun dengan harga jual Rp ,00 per unit. Perusahaan harus menambah kapasitas produksinya, karena itu perusahaan akan menambah bangunan dan peralatan.

30 Perusahaan memperkirakan bangunan memerlukan biaya Rp ,00 dan peralatan Rp ,00. Selain itu perusahaan juga memerlukan tambahan modal kerja sebesar Rp ,00. Biaya variabel per unit Rp ,00 dan jumlah biaya tetap per tahun Rp ,00.

31 Tarif pajak 40%. Depresiasi dengan metode garis lurus. Pada akhir tahun 2012 diharapkan bangunan dapat terjual dengan harga Rp ,00 dan peralatan Rp ,00. Depresiasi per tahun: Bangunan Rp ,00 Peralatan Rp ,00

32 Bangunan (Rp) Peralatan (Rp) Nilai jual Nilai buku 0 0 Gain on sales of Assets Pajak Arus kas

33 Laporan Rugi Laba Hasil penjualan Rp ,00 Biaya variabel ,00 Biaya tetap ,00 Depresiasi bangunan ,00 Depresiasi peralatan , ,00 Laba sebelum pajak ,00 Pajak, 40% ,00 Laba setelah pajak ,00

34 Arus Kas terdiri dari: Investasi awal Rp ,00 Arus kas operasi Rp ,00 per tahun selama 4 tahun Arus kas terminal pada akhir tahun ke 4 sebesar Rp ,00.

35 Bloopers Industries chapter 8: Brealey, Myers & Marcus Investment of $ 10,000,000 in mining machinery, at the end of 5 years the ore deposit is exhaused The company applies straight line depreciation Tax 35% A/R turn over 6 kali per tahun Inventory = 15% dari expenses tahun berikutnya

36 In year 1 revenue $ 15,000,000 and increase by 5% per year. In year 1 expenses $ 10,000,000 and increase at 5% a year. Equipment can be sold at the end of the project $ 2,000,000

37 Revenues & A/R (in 000 ) Year 0 Revenues 1 $ 15,000 $ 2,500 2 $ 15,750 2,625 3 $ 16,538 2,756 4 $ 17,364 2,894 5 $ 18,233 3,039 A/R

38 Expenses & Inventory ( in 000 ) Year Expenses Inventory 0 $ 1,500 1 $ 10,000 $ 1,575 2 $ 10,500 $ 1,654 3 $ 11,025 $ 1,736 4 $ 11,576 $ 1,823 5 $ 12,155

39 A/R,Inventory & WC Year A/R Inventory WC 0 $ 1,500 $ 1,500 1 $ 2,500 $ 1,575 $ 4, ,625 $ 1,654 $ 4, ,756 $ 1,736 $ 4, ,894 $ 1,823 $ 4, ,039 $ 3,039

40 An increase in working capital is an investment, and therefore implies a negative cash flow; a decrease in working capital implies a positive cash flow. In years 1-4 the change is positive; in these years the project requires a continuing investment in working capital. In year 5 the change is negative; there is a disinvestment as working capital is recovered.

41 Income Statement Revenues $ 15,000 $ 15,750 $ 16,538 $ 17,364 18,233 Expenses 10,000 $ 10,500 $ 11,025 $ 11,576 12,155 Depr 2,000 2,000 2,000 2,000 2,000 Profit before tax 3,000 3,250 3,513 3,788 4,078 Tax 1,050 1,138 1,229 1,326 1,427 Profit after tax 1,950 2,113 2,284 2,462 2,651

42 Cash Flow ( in 000 ) Initial Cash flow -$10,000 Salvage $ 1,300 value Investm ent in Working capital Operatio nal Cash flow - $ 1,500 - $ 2,575 - $ $214 - $ 224 $ 1,678 $ 3,039 $ 3,950 $ 4,113 $ 4,284 $ 4,462 $ 4,651 Total -$11,500 1,375 3,909 4,070 4,238 6,329 4,339

43 Powell corporation Chapter 11: Gitman& Zutter New Machine: Purchase price $ 380,000, installation costs $ 20,000, to be depreciated under MACRS using a 5- year recovery period The replacement increase in current assets $ 35,000 and increase in current liabilities $ 18,000 increase in working capital $ 17,000 Tax rate 40% Revenue and expenses (excl. Depr& interest) as follow:

44 Year Revenue Expenses 1 $ 2,520,000 $ 2,300,000 2 $ 2,520,000 $ 2,300,000 3 $ 2,520,000 $ 2,300,000 4 $ 2,520,000 $ 2,300,000 5 $ 2,520,000 $ 2,300,000

45 Old Machine: Was purchase 3 years ago at a cost $ 240,000 and was being depreciation under MACRS using a 5-year recovery period Buyer willing to pay $ 280,000 Revenue and expenses (excl. Depr & interest) as follow:

46 Year Revenues Expenses 1 $ 2,200,000 $ 1,990,000 2 $ 2,300,000 $ 2,110,000 3 $ 2,400,000 $ 2,230,000 4 $ 2,400,000 $ 2,250,000 5 $ 2,250,000 $ 2,120,000

47 After tax proceeds from sale of old machine: Nilai jual $ 280,000 Nilai buku 69,600 Gain on sales 210,400 Pajak 40% 84,160 $ 195,840

48 Initial Investment Cost of new machine: - Cost of machine $ 380,000 - Cost of installation 20,000 + $ 400,000 After tax proceeds from sale of old machine : - proceeds from sale of old machine $ 280,000 - Tax on sale of old machine 84,160 $ 195,840 Change in working capital $ 17,000 + $ 221,160

49 Depreciation Expenses-New Machine Year Depreciation percentage Depreciation expenses 1 20% $ 80, % 128, % 76, % 48, % 48, % 20,000

50 Depreciation Expenses-Old Machine Year Depreciation percentage Depreciation Expenses 1 12% 28, % 28, % 12,

51 Operating cash flow-new Machine Revenue $ 2,520,000 $ 2,520,000 $ 2,520,000 $ 2,520,000 $ 2,520,000 Expenses 2,300,000 2,300,000 2,300,000 2,300,000 2,300,000 Earning before Depr, Interest and Taxes 220, , , , ,000 Depreciation 80, ,000 76,000 48,000 48,000 20,000 Earning before Interest and Taxes 140,000 92, , , ,000-20,000 Taxes 56,000 36,800 57,600 68,800 68,800-8,000 Net operating profit after taxes 84,000 55,200 86, , ,200-12,000 Depreciation 80, ,000 76,000 48,000 48,000 20,000 Cash flow 164, , , , ,200 8,000

52 Operating cash flow-old Machine Revenue $ 2,200,000 $ 2,300,000 $ 2,400,000 $ 2,400,000 $ 2,250,000 Expenses 1,990,000 2,110,000 2,230,000 2,250,000 2,120,000 Earning before Depr, Interest and Taxes 210, , , , ,000 Depreciation 28,800 28,800 12,000 Earning before Interest and Taxes 181, , , , ,000 Taxes 72,480 64,480 63,200 60,000 52,000 Net operating profit after taxes 108,720 96,720 94,800 90,000 78,000 Depreciation 28,800 28,800 12,000 Cash flow 137, , ,800 90,000 78,000

53 Incremental operating cash flow New Machine $164,000 $183,200 $162,400 $151,200 $151,200 $ 8,000 Old Machine 137, , ,800 90,000 78,000 Cash Flow 26,480 57,680 55,600 61,200 73,200 8,000

54 Incremental operating cash flow: Δ EBDIT x ( 1 t ) + (ΔD x t )

55 Terminal cash flow After tax proceeds from sale of new machine : - proceeds from sale of new machine $ 50,000 - Tax on sale of new machine 12,000 $ 38,000 After tax proceeds from sale of old machine : - proceeds from sale of old machine $ 10,000 - Tax on sale of old machine 4,000 $ 6,000 Change in working capital $ 17,000 + $ 49,000

56 Replacement Project Intialcash flow $ 221,160 Operating cash flow: 1 $ 26, , , , ,200 Terminal cash flow $ 49,000