A Feasibility Study to Buy Metal Plate Press Machine in PT.

X
William Budiharsono
Faculty of Technology, Industrial Engineering Department, President University Jl. Ki Hajar Dewantara Kota Jababeka,Cikarang, Bekasi - Indonesia 17550 Email: william_budiharsono@hotmail.com

ABSTRACT
While automotive industry in SEA market are growing rapidly, manufacturer hardly keeps up with the demand. Therefore, capacity upgrade are necessary to satisfy the market. While current capacity has a limit, new equipment sourcing is inevitable. To source a new machine/ equipment requires a considerable amount of capital expense. Therefore, to decide whenever the project is feasible or not, a feasibility study need to be conducted. Feasibility study is one of the most used tools for decision making, not only to secure and being one of the requirement analysis in financing project, but it also necessary to analyze the benefit and disadvantage of the investment project. There are three different focus of study within this research, there are market, technical, and financial aspect. In the market feasibility study, historical demand and business trends analysis will determine future state of market. Technical aspect will focus on material availability and machine compatibility to the available space in facility, product specification, and production capacity. While financial aspect will focus on the cash flow and break-even analysis to further determine the internal rate of return of the investment. In the end, this research has successfully shown the feasibility of all three aspect (market, technical, and financial) and lead to a prospective breakeven point of two years period with 28% rate of return. Thus, concludes feasibilities of the project. Keywords: Feasibility Study, Automotive, Project Financing, Decision Making, Break-Even Analysis, Internal Rate of Return

1. Introduction
PT. X is an auto-parts producer and supplier that specialized in light metal parts production that processed through metal sheet working activities such as pressing, cutting, welding, etc. They are located in Jababeka Industrial Park, one of the largest industrial estate in Indonesia. The problem for PT. X arise when their current machines are not capable to produce the new products. This is happened because the products that ordered by PT. XYZ has larger dimension than the usual products produce by PT. X. Hence, they need to buy a new metal press machine. Based on product preference of PT. Xs management, SEYI SNS2-400 was selected, with a quoted product price + CIF of over 6 billion rupiah, buying this new machine required a lot of capital expenditure from PT. X. Considering large capital investment in upgrading to newer press machine, PT. X wants to identify if this project is feasible to be implemented. Also, this research also expected to identify any aspects in each feasibility study elements that need to be analyzed and what are their analyses.

2. Methods
2.1 Initial Observation The initial observation will be conducted to define the reasoning of any capital expenditure decision of PT. X. This further can be used in defining the objectives of potential project. The observation will cover all the processes involved in analyzing the investment opportunity, as is in the feasibility study outline. Necessary data are requested to each respected department of PT. X. The gathered information will then be documented to be studied for the author learning points. The documented information will include revenue potential based on projected demand from the project, supply capacity projection, technical specification of machine, capital expenditure (investment cost), operational cost, and any additional risk and secondary cost that might occur during project conducted.

2.2 Problem Identification The next step is to identify the problem itself. After conducting the initial observation, it is concluded the problem as to decide if the project should be undertaken or not, PT. Xs management need to identify if project are feasible or not. The author end product should consist of sets of recommendation to PT. Xs management regarding feasibilities of the project. 2.3 Literature Study Major focus of PT. X business involving Sheet Metal Working activities. Metal that formed info a thin and flat piece is called as sheet metal. This commodity is the generic form that used in metal working. The thin and flat form ease further process to bend and cut the sheets into desired physical form. The raw material are often sold as metal sheet roll or any rectangular shapes. Which need to be processed to obtain the desired shape. 2.3.1 Feasibility Study Feasibility study consists of controlled process for identifying problems and opportunity, determining objectives, describing situations, defining result from cost-benefit analysis of potential project. For decision makers, a new investment project need to financially viable, which have a positive economic value projection overtime. Ensuring achievement of BEP and calculating the ROI in certain period. Feasibility study not only required by management as a decision making instrument, but also by financial institution in financing project. According to Husnan (1997), there are several primary objective that a feasibility study should able to answer. However, due to the nature of project, this research will only focused on 3 feasibility elements. 1. Market Feasibility Is there are existed market to hold additional supply, and is the market sustainable? (Demand availability analysis) 2. Technical/ Technology Feasibility Is the project supported by project owner current resources? (E.g. material supply, work force, facility support) 3. Financial/ Economical Feasibility Is the project benefit will overcome project cost? (Cost-benefit analysis of project) 2.3.1.1 Market Feasibility Market feasibility analysis usually consist of identification and analysis of the market opportunity (e.g. market size versus market share and demand projection based on historical trends) and their comparison with supply level. This analysis will focus on defining area of development by finding any gap of supply and demand level. In limited extend, market feasibility might also highlighting on pricing strategy and as well as marketing and sales strategy to achieve projection of demand, however, this will depends on the project nature. There are some typical market feasibility question (Husnan, 1997) such as: How to determine the future market potential (demand projection)? How the historical trends of sales, and what are the affecting variables? Is there any gap existed between supplies and demands? How is the marketing strategy that required to achieve the projected demand? Demand Projection (Forecasting) According to Tersine (1998), forecasting can be define as prediction, projection or estimation of the occurrences of uncertain future events or level of activity. Forecasting are widely used in many production planning activity, describing future states, including their opportunity and challenge. Forecasted data are used by corporates to strategically optimized production process, which estimates the optimal capacity of supply to capture demand opportunity.

Qualitative Forecasting Methodology Qualitative methodology relies on human capability in making judgment and experiences. Therefore, no calculation is required. The examples of qualitative methods are market research, expert opinion and Delphi technique. Market Research Market Research is the collection and analysis of facts related to the information needed to determine the forecasting. Expert Opinion The forecasting is performed by asking experts opinion for project future sales. Delphi Technique In the Delphi technique, sets of questions possibly with supporting background information is sent to each participant. Once the answers are received, the participant with answers deviating significantly from the average are asked to explain their reasoning. These reasons plus statistical summary of all answers are sent to each member of the panel with request to consider this information and decode whether they want to stand by the original responses or modify them. 2.3.1.2 Technical & Technology Feasibility According to Kendall & Kendall (2002), technical feasibility should assess whether the current technical specification of companys resources are sufficient for the project implementation. This are the starting point of feasibility study, as the basic requirement of the project are gathered through a checklist that distributed among the decision maker (project owner). However, technical feasibility also should be able to answer any possibility of modification or upgrading current environment to facilitate the project. There are some typical technical feasibility question (Husnan, 1997) such as: Is the project feasible within the limits of current technology? Is the required technology currently exist and practical? Is it available within given resource constraints? Do we have enough manpower to operate the technology? Are there any specific training need to be conduct to prepare the man power? Do current facility provide sufficient resources for new technology? Does the technology have the capacity to handle the solution? Production and Work Measurement Armendariz (2009) states that is crucial to ensure speed/ time definition of the work and production process. A proper time study of current production process are required to estimate and project the production capacity of new machine. Time study is a measurement of work performance to calculate the productivity of production process. Since the machine new, it is almost impossible to calculate the exact time for performing time study. An estimation based approach will be conducted by PT. Xs management to further use in calculating production capacity. Material Availability Analysis Stocks of material used in production will be analyzed of its sustainability degree, business review of commodity market and supplier availability analysis will be employed to identify it. Facility Layout and Design Identification whether the facility could support the upgrade or not are crucial, since a new machine might be require some extend space. Calculation of area and height as well as changes in current elements in the facility is very crucial to ensure an effective and efficient process in manufacturing facilities. This layout change should fulfilled some objectives like: Provide optimum space to install equipment and ensure movement of entities and to create safe and efficient work environment. Provide efficiency by reducing movement and effort required by workers, material, and equipment. Provide flexibility to accommodate product and technology development. Ensuring safety of workers and equipment while increasing capacity of production.

2.3.1.3 Financial Feasibility Financial feasibility mainly focused on time and money that involved in the project (Kendall & Kendall, 2011), most feasibility study uses cost-benefit analysis to evaluate the effectiveness of the project. During cost-benefit analysis, cost and benefit need to be separated to ensure a consistent and independent calculation between them. Moreover, cost-benefit analysis also need to projected secondary or indirect cost instead just the primary cost. According to Prest & Turvey (1965), formulation of cost-benefit analysis should consist of general principle such as: Which cost and which benefit are to be included in calculation? What is the classification of the cost and benefit? How are they to be valued? At what interest rate are they to be discounted? What are the relevant constraints? There are two types of cost, project-related cost and operational cost (Castro & Mylopoulos, 2004). a) Capital Expenditure (project-related cost) Cost that occur because of project execution, which happened during initial period of project. Consist of development and purchasing cost, installation, training and conversion of technology cost. b) Operational cost (on-going) Cost that occur after project go-live, as daily operation carried-on. Consist of maintenance of investment object and facilities, personnel related cost, and activity cost. Cost-benefit analysis (CBA) should involve secondary cost and risk valuation in the calculation, secondary cost can be consisted of maintenance cost and equipment depreciation cost, while risk could be averted by insurance cost. (Ross et all, 2003)

(1) Meanwhile, benefit are considered as the positive cash flow to organization as result of an activity, in this case a project. Although usually benefit comes in form of revenue, other intangible aspect also need to be carefully considerate. In financial feasibility study, benefit need to overcome the cost of a project to be considered as feasible. This concept are commonly used in profit calculation. To perform CBA, a series of break-even analysis need to be conducted. This further can be used to determine the internal rate of return and investment attractiveness, for further determines the financial feasibility of the project. Cash Flow Statement According to Helfert (2001), cash flow statement is the statement of how much revenue generates and resources used in order to operate a business. The usual distribution of cash flow statement is to divide the information to operation, investing, and financing cash flow.

(2)

Figure 1 Cash Flow Structure

a) Operating Cash Flow Operating cash flow records all activities involved in regular daily operations, this will includes the value generated and value paid out during normal course of business. The key elements of operating cash flow are: Revenues Cost of Goods Sold (COGS) Sales, General, and Administrations (SG&A) Interests Taxes b) Investing Cash Flow Investing cash flow records all activities related to investment actions, for example capital expense to purchase asset(s) or proceeds from sale of investment(s). c) Financing Cash Flow Financing cash flow associated with the funding of the asset of the business. This usually in the scale of corporate investment and involving shareholder level interaction, therefore, the principle will not employed in the research. Break-Even Analysis According to Ross et all (2002), break-even analysis can be describe as an analysis of relationship between cost (fixed and variable) and revenue (price and volume) to identify changes in profitability of business. While break-even point become a point when a business is neither make profit or loss, break-even analysis can be used as deciding factor on the short-term planning, whether the project is feasible or not.

Figure 2 Break-Even Analysis Chart

In Figure 2, red area indicates a condition when company still faced loss, while green area indicates profit. While the intersection between total cost (TC) and total revenue (TR), become the break-even point (TC=TR).

Where: BEP = Break-Even Point TFC = Total Fixed Cost SPU = Sales Price per Unit VCU = Variable Cost per Unit

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Internal Rate of Return (IRR)/ Rate of Return (ROR) According to Benninga (2000), Internal Rate of Return (IRR) can be define as a compound rate of return calculates when the Break-Even Point (BEP) achieved. IRR calculation will required an estimation, using NPV calculation formula when NPV reach a value of 0 (zero). Where: NPV = Net Present Value r = IRR n = number of year passed; Cn = Cash flow at n period N = total number of period (4)

When determining financial feasibility of a project, easiest way to identify if the return of investment in percentage calculation is to compare the internal rate of return (IRR) with available minimum attractive rate of return (MARR). MARR can be as simple as rate of bank interest or other investment return. This research setup MARR level in 5.75% (Rate of interest is the interest rate of Indonesian Central Bank, obtained 14 May 2013)

2.4 Data Collection and Analysis

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Market Feasibility Study Based on recent report of The Boston Consulting Group (BCG) and Frost Sullivan, market elements contribute in driving Indonesia to a sustained economic growth towards 2020, indicates by the 8% CAGR of MAC towards 2020. This projection also backed by regional GDP growth trends of 6% p.a. with Indonesia leading the growth by 6.46% in 2012. The trends contribute further to increase Indonesian consumer market buying power. Automotive industry of Indonesia also affected by the trends, boost by Ministry of Industry master plan, which will reach 10% CAGR (MPV minivan) by 2018. Manufacturer are pacing to provide adequate supply (cars and their parts) to answer those demand. As demand of cars rises, demand of parts will also increase. Thus indicates that the trends of parts market will be growing following the trends of sales with a CAGR of 10% p.a., while those trends will sustained towards 2018-2020. Demand Projection Model Assuming demand growth will follow the GDP growth, with a growth rate of 6% p.a. then a demand model can be built. Table 4.2 shown the summary of demand projection for June 2012 May 2016 using 6% p.a. as a possible growth rate.

Table 1 Projected Demand Model June 2013 May 2016

Part Name BRACKET FRONT DOOR W/R LIFT ARM HINGE FRONT DOOR LOWER FEMALE CLUTCH ARM DOOR WINDOW REGULATOR LIFT SPRING CLUTCH DIAPRAGHM SPRING CLUTCH DISC Part Number D161-87602 D162-87602 D169-87602 M217-87605 M218-87605 June 2012 - June 2013 - June 2014 - June 2015 May 2013 May 2014 May 2015 May 2016 600,400 600,400 1,200,800 300,200 300,200 636,424 636,424 1,272,848 318,212 318,212 674,609 674,609 1,349,219 337,305 337,305 715,086 715,086 1,430,172 357,543 357,543

Technical Feasibility Study PT. Xs current facility height is 6670 mm at the shortest point, since SNS2-400 only required 4820 mm, then the machine height is not a problem. The main issue is the floor space required by SNS2-400, with dimension of 3785 x 3035 mm plus metal sheet feeder (with dimension of 1250 x 800 mm) installed in the side of machine. With a total required dimension of 5035 x 3835 mm or the area of 19.31 M2. PT. Xs management identify a potential space nearby the 200-tonnage single crank machine area. A free space with dimension of 10.000 x 5.000 meters, nearby warehouse and entry, PT. Xs management looking for showcase the machine to the investor. With regards to all factor, it is really possible to install SNS2-400 next to that 200Tonnage machine area. By utilizing such space, since the production only comprise of a single punching process (using progressive dies), these layout will not affecting nor effecting current productivity rate of production process.
20464.04
6561.62 39369.70

Welding Area
14000

Stamping Area
General punching area 50 400 tonnage punch machine Total machine = 20

Single crank 200 tonnage area Warehouse Area

17224.24

Potential area for new machine

Engineering Area

Maintenance Area

1640.40

3500 14950

10000

Figure 3 Proposed Layout Changes (Scale 1: 500)

Daily PT. Xs operation are divided by 3 shift, each shift duration is 8 hour, with 1 hour per shift for employee break. First shift start at 4.00am and ended at 12.00am, while second one start at 12.00am and ended at 8.00pm, last shift will start at 8.00pm and ended by 4.00am. First and last half-hour of each shift will be used for briefing and debrief.
Table 2 Stroking Hour Required per Product (Estimated Demand Period June 2015 May 2016)
HINGE FRONT ARM DOOR BRACKET DOOR LOWER WINDOW FRONT DOOR FEMALE REGULATOR W/R LIFT ARM CLUTCH LIFT Part Number D161-87602 D162-87602 D169-87602 Customer XYZ XYZ XYZ Total per Year 715,086.01 715,086.01 1,430,172.01 Stroke/ hour 1,700.00 1,500.00 1,200.00 Required hour per year 420.64 476.72 1,191.81 Required hour per month 35.05 39.73 99.32 Part Name SPRING CLUTCH DIAPRAGHM M217-87605 XYZ 357,543.00 1,000.00 357.54 29.80 SPRING CLUTCH DISC M218-87605 XYZ 357,543.00 700.00 510.78 42.56

2,957.49 246.46

Table 2 shown stroking hour required per product by using estimated highest demand required that occurs during period of June 2015 May 2016. Compared to the available stroking hour per year (2,957.49 hour required per year vs. 3,379.20 hour available per year), one machine production capacity is enough to

fulfilled the demand. Assuming the machine is not 100% efficient, SEYI guaranteed efficiency level of the machine by 95-97%. If the efficiency rate are applied to the production capacity then:

Based on the prediction on actual time required, the machine production capacity still 8.5% higher than the available time. Besides enough to fill the demand required, the investment also left some room for improvement, which will be useful to anticipate sudden spike of demand by customer by 8% - 13% compared with current capacity. This result in a degree of flexibility of production in facing sudden changes in demand. Thus, with all this elements, technical feasibility can be concluded as feasible. Financial Feasibility Study As a form of investment, acquiring new machine has to be contribute benefit in form of return of investment value to the investor, in this case PT. X. While acquiring the machine requires a considerably amount of capital expenditure, that amount should be returned overtime plus additional benefit. Based on the understanding, this investment will be analyzed by employ financial feasibility principle. Based on data collection, we can identify the cash flow and its projection throughout 3-year product lifecycle.
Table 3 Projected Cash Flow (3-Year Product Lifecycle) Operating Cash Flow June 2013 - May 2014 June 2014 - May 2015 June 2015 - May 2016
Revenue Product Sales (Revenue) TOTAL Revenue Cost of Goods Sold (COGS) Direct Material Dies Direct Labor Factory Overhead (FOH) TOTAL COGS Gross Profit Sales, General, & Administration (SG&A) Cost of Sales Insurance Cost TOTAL SG&A COST Earning Before Interest, Tax, Depreciation, Amortization (EBITDA) Depreciation, Interest, and Tax Depreciation Cost Interest Value Added Tax TOTAL Earning After Tax (EAT) Rp53,523,258,400 Rp53,523,258,400 m1 Rp15,936,435,897 Rp30,514,409,387 Rp180,000,000 Rp204,761,818 Rp46,835,607,101 Rp6,687,651,299 m1 Rp142,560,000 Rp550,746,000 Rp693,306,000 Rp5,994,345,299 m1 Rp162,776,000 Rp536,977,350 Rp599,434,530 Rp1,299,187,880 Rp4,695,157,419 m1 Rp2,141,790,000 Rp795,522,000 Rp305,970,000 Rp3,243,282,000 Rp1,451,875,419 Rp0 Rp1,451,875,419 Rp56,734,653,904 Rp56,734,653,904 m2 Rp16,892,622,051 Rp32,345,273,950 Rp180,000,000 Rp204,761,818 Rp49,622,657,818 Rp7,111,996,086 m2 Rp142,560,000 Rp550,746,000 Rp693,306,000 Rp6,418,690,086 m2 Rp162,776,000 Rp536,977,350 Rp641,869,009 Rp1,341,622,359 Rp5,077,067,727 m2 Rp0 Rp795,522,000 Rp0 Rp795,522,000 Rp4,281,545,727 Rp1,451,875,419 Rp5,733,421,146 Rp60,138,733,138 Rp60,138,733,138 m3 Rp17,906,179,374 Rp34,285,990,387 Rp180,000,000 Rp204,761,818 Rp52,576,931,578 Rp7,561,801,560 m3 Rp142,560,000 Rp550,746,000 Rp693,306,000 Rp6,868,495,560 m3 Rp162,776,000 Rp536,977,350 Rp686,849,556 Rp1,386,602,906 Rp5,481,892,654 m3 Rp0 Rp795,522,000 Rp0 Rp795,522,000 Rp4,686,370,654 Rp5,733,421,146 Rp10,419,791,800

Investing Cash Flow

Investment Cost Financing (-Interest) Project Cost TOTAL Capital Outflow Cash Inflow/ Outflow Previous Balance Net Cash Inflow/ Outflow

Resulted from the analysis, a break-even analysis can be developed to identify the break-even point and internal rate of return (IRR).
Table 4 Summary of Break-Even Analysis per Product

Product D161-87602 D162-87602 D169-87602 M217-87605 M218-87605

Fixed Cost 215,613,564 215,613,564 431,227,127 107,806,782 107,806,782

Variable Actual Price Cost Units 12,282 14,600 93,013 14,491 17,100 82,656 12,449 14,800 183,394 23,695 25,300 67,176 18,938 20,300 79,164

BEP

Value 1,357,993,397 1,413,414,214 2,714,228,114 1,699,559,811 1,607,026,326

To calculate break-even of the investment, profit mix from all product per period need to be compared with cost mix from all product.

Break-Even Analysis
Rp25,000,000,000

Rp20,000,000,000

Rp15,000,000,000

Investment Value

Rp10,000,000,000

Profit per Year

Rp5,000,000,000

Rp0 0 1 1 2 2 3 3 4 4 5 5 6,425,370,000.00 Break-Even Point (units) = 2 Break-Even Point (Rp's) = Rp

Figure 4 Break-Even Analysis of Investment

The graph shown that within two year period, the profit per year graph are crossing the investment value, hence indicates the break-even point.
Table 5 Break-Even Analysis Cash Flow

Year Investment Value 0 Rp 6,425,370,000 1 Rp 6,425,370,000 2 Rp 6,425,370,000

Profit per Year Cash Flow Rp 1,451,875,419 Rp (6,425,370,000) Rp 4,281,545,727 Rp (2,143,824,273) Rp 4,686,370,654 Rp 2,137,721,454 2 Rp 6,425,370,000

Break-Even Point (Year) = Break-Even Point (Rp's) =

Internal rate of return (IRR) will determine the rate of return of investment by using break-even point as calculation milestone, in order to calculate IRR, the author utilized Microsofts Excel formula (IRR).
Table 6 Internal Rate of Return Yearly
A 1 2 3 4 5 Data Rp (6,425,370,000) Rp 4,281,545,727 Rp 5,077,067,727 28% B Description Initial cost of a business Net income for the first year Net income for the second year Internal rate of return after one year

While the achievement of break-even point of investment is fast, the internal rate of return (IRR) also shown a really good rate. Compared with minimum available attractive rate of return (MARR), the project is capable to project a 28% return rate, while MARR only able to provide 5.75%. Thus indicates the high level of investment attractiveness, and concludes the financial feasibility study as a feasible investment.
Table 7 IRR and Expected Return Comparison Value Details Project MARR IRR 28% 5.75% 8,804,286,750 Capital Expenditure Expected Return in one year 11,269,487,040 9,310,533,238

Investment Financial Fact Summary

12,000,000,000 10,000,000,000 8,000,000,000 6,000,000,000 4,000,000,000 2,000,000,000 Expected Return in one year IRR 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00%

Project 11,269,487,040 28.00%

MARR 9,310,533,238 5.75%

Figure 5 Project vs. MARR Comparison

3. Conclusion Large capital expenditure required to undertake this project concern PT. Xs management, this feasibility study has successfully shown the cost and benefit of the investment. This research also successfully provide answers to address PT. Xs management concern. There are 3 different analysis focus in this research, they are: market, technical, and financial aspect. Starting from marketing standpoint, the investment have a solid foundation, with a stable projected demand (based on fixed order from customer. Demand level expected to growth as SEA market become more attractive for the investors, especially Indonesian market. A stablehigh GDP growth by >6% and expert prediction of 28% CAGR for automobile industry, the project setup a 6% annual growth for demand. Thus this project is feasible in terms of market-related factor. Technical aspect also supported the project with material availability analysis that ensure the supplier availability of the material. Machine capability to produce the products also able to keep up, even left some rooms for capacity increase, with the demand projected from market analysis. While compatibility of facility and the machine and machine with products also not become a problem, this project is feasible in terms of technical-related factor. Most of investment objective usually towards profit making. Analyzing cost and revenue structure that built from projected demand, this investment project has a really fast breakeven period. By only 2 years required to achieve break-even point, PT. X can expect a really fast payback period. While the internal rate of return reach a great level of 28% compared to MARR with only 5.75%, this project is feasible in terms of financial-related factor. References

1. 2. 3. 4.

Benninga, Simon., Financial Modelling. 2000. Corwin, Scott, et al., 2013 Automotive Industry Perspective. 2012. Husnan, Suad., Studi Kelayakan Proyek. 1997. Kendall, Kenneth E. and Kendall, Julie E., Determining Feasibility and Managing Analysis and Design Activities. 2002. 5. Rastogi, Vaishali, et al., The Boston Consulting Group, Indonesias Rising MiddleClass and Affluent Consumers. 2013. 6. Ross and et all., Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition. 2003. 7. Vaidya, Vivek., Frost & Sullivan 2013 Indonesia Automotive Market Outlook. 2012.