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 untuk
Expenditure memperoleh manfaat dalam jangka panjang
Current Expenditure: Pengeluaran dana oleh perusahaan yang
diharapkan untuk
memperoleh manfaat dalam jangka waktu satu
tahun
Expansion
Replacement
Renewal
Other Purposes
Basic 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 Flow
Terminal Cash Flow 5.000

Net Operating Cash Inflows

700 1.000 1.400 2.000 2.100

0

1 2 3 4 5
Initial Investment
10.000

Initial Investment for Replacement.

Cost of new assets

+ Installation costs

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 - Proceeds from sale of old assets
-/+ 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 KAS
TYPE SIGN ON NET CASH FLOW NUMBER OF
0 1 2 3 4 5 6 SIGN CHANGE
Conventional - + + + + + + 1
Conventional - - - + + + + 1
Conventional + + + + + - - 1
Non Conventional - + + + - - - 2
Non Conventional + + - - - + + 2
Non 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 1.000.000.000,00
Biaya surat-surat Rp 5.000.000,00
Modal kerja Rp 5.000.000,00
Initial Investment Rp 1.010.000.000,00

Net Operating Cash Inflow

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

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Terminal Cash Flow.
Hasil Penjualan Bus Rp 50.000.000,00
Pajak Penjualan 10 % Rp 5.000.000,00
Net 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 10
Rp 1.010.000.000,00

II. Proyek Penggantian.

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

Harga beli mesin baru Rp 380.000,00

Biaya instalasi mesin Rp 20.000,00
Umur ekonomis 5 tahun

Harga beli mesin lama 3 tahun yang lalu Rp 240.000,00

Harga jual mesin lama saat ini Rp 280.000,00
Umur ekonomis 5 tahun

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

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

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

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 LAMA

TAHUN PENDAPATAN BIAYA PENDAPATAN BIAYA
1 Rp 2.520,00 Rp 2.300,00 Rp 2.200,00 Rp 1.990,00
2 Rp 2.520,00 Rp 2.300,00 Rp 2.300,00 Rp 2.110,00
3 Rp 2.520,00 Rp 2.300,00 Rp 2.400,00 Rp 2.230,00
4 Rp 2.520,00 Rp 2.300,00 Rp 2.400,00 Rp 2.250,00
5 Rp 2.520,00 Rp 2.300,00 Rp 2.250,00 Rp 2.120,00

MESIN BARU LABA DEPRE NOCIF

TH PENDAPATAN BIAYA SEBELUM SIASI EBIT PAJAK
DEP. & 10%
PAJAK
1 Rp 2.520,00 Rp 2.300,00 Rp 220,00 Rp 80,00 Rp 140,00 Rp 14,00 Rp 206,00
2 Rp 2.520,00 Rp 2.300,00 Rp 220,00 Rp 80,00 Rp 140,00 Rp 14,00 Rp 206,00
3 Rp 2.520,00 Rp 2.300,00 Rp 220,00 Rp 80,00 Rp 140,00 Rp 14,00 Rp 206,00
4 Rp 2.520,00 Rp 2.300,00 Rp 220,00 Rp 80,00 Rp 140,00 Rp 14,00 Rp 206,00
5 Rp 2.520,00 Rp 2.300,00 Rp 220,00 Rp 80,00 Rp 140,00 Rp 14,00 Rp 206,00
MESIN LAMA
TH PENDAPATAN BIAYA
1 Rp 2.200,00 Rp 1.990,00 Rp 210,00 Rp 48,00 Rp 162,00 Rp 16,20 Rp 193,80
2 Rp 2.300,00 Rp 2.110,00 Rp 190,00 Rp 48,00 Rp 142,00 Rp 14,20 Rp 175,80
3 Rp 2.400,00 Rp 2.230,00 Rp 170,00 Rp 0,00 Rp 170,00 Rp 17,00 Rp 153,00
4 Rp 2.400,00 Rp 2.250,00 Rp 150,00 Rp 0,00 Rp 150,00 Rp 15,00 Rp 135,00
5 Rp 2.250,00 Rp 2.120,00 Rp 130,00 Rp 0,00 Rp 130,00 Rp 13,00 Rp 117,00

NO CIF RELEVANT CASH FLOW

T MESIN BARU MESIN LAMA
H
1 Rp 206,00 Rp 193,80 Rp 12,20
2 Rp 206,00 Rp 175,80 Rp 30,20
3 Rp 206,00 Rp 153,00 Rp 53,00
4 Rp 206,00 Rp 135,00 Rp 71,00
5 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 50.000,00

Pajak penjualan mesin baru Rp 5.000,00

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Perubahan modal kerja bersih Rp 17.000,00
Terminal Net Cash In Flow Rp 23.000,00

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.

Project
A B
Initial Investment $ 42,000.00 $ 45,000.00
Year
1 $ 14,000.00 $ 28,000.00
2 $ 14,000.00 $ 12,000.00
3 $ 14,000.00 $ 10,000.00
4 $ 14,000.00 $ 10,000.00
5 $ 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 inflows
B
$ 45,000.00
Accumulated Cash inflows
$ 28,000.00 $ 28,000.00
$ 12,000.00 $ 40,000.00
$ 10,000.00 $ 50,000.00
$ 10,000.00
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 $ 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
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

n
NPV = 
t 1
– Initial Investment

NPV calculation for Project A

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

NPV calculation for Project B

Year Cash Inflows PVIF, 10%, 5 Years PV
1 $ 28,000.00 0.909 $ 25,452
2 $ 12,000.00 0.826 9,912
3 $ 10,000.00 0.751 7,510
4 $ 10,000.00 0.683 6,830
5 $ 10,000.00 0.621 6,210
PV of cash inflows $ 55,914
Initial 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

n n
0= 
t 1
– Initial Investment OR t 1
= Initial Investment

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IRR = k1 + (k2 – k1)

Example.

Capital expenditure data for Barnet Company.

Project
A B
Initial Investment $ 42,000.00 $ 45,000.00
Year
1 $ 14,000.00 $ 28,000.00
2 $ 14,000.00 $ 12,000.00
3 $ 14,000.00 $ 10,000.00
4 $ 14,000.00 $ 10,000.00
5 $ 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 41868.56996
Initial Investment 42,000 42,000
NPV 1,780 -131

IRR = k1 + (k2 – k1)

IRR = 18% + (20% – 18%)

IRR = 19,8%

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 Project B k1 = 18% k2 = 22%
1 $28,000.00 23728.81356 22950.81967
2 $12,000.00 8618.213157 8062.348831
3 $10,000.00 6086.308727 5507.068874
4 $10,000.00 5157.888752 4513.99088
5 $10,000.00 4371.092162 3699.992525
PV of cash
inflows 47962.31636 44734.22078
Initial Investment 45,000 45,000
NPV 2,962 -266

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 NPV

A B
0% $ 28,000.00 $ 25,000.00
10% 11,074.00 10,914.00
20% 0 1295
22% -131 0

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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 capital
IRR : the intermediate cash inflows are reinvested at the rate equal to the
project’s IRR

Project with similar sized investment.

CASH INFLOW PATTERN

Discount Rate Lower Early Year Cash Higher Early Year Cash
Inflows Inflows
Low Preferred Not Preferred
High 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.

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 Practical View
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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