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# Should PT.Kabitama Chem Tex Invest on Foundry Pig Iron or HMS (High Mild Steel Scrap) in Order to Expand its Metal Business?

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“Should PT.Kabitama Chem Tex Invest on Foundry Pig Iron or HMS (High Mild Steel Scrap) in Order to Expand its Metal Business?”

 Calculations[8] Pig Iron HMS Expected values (\$5660949A—0.7)-(\$566094.9A—0.3)= \$3792835.83 (\$5649756A—0.9)-(\$1412439A—0.1)= \$4943536.5 Net Expected values \$3792835.83-\$2500000= \$1292835.83 \$4943536.5-\$2200000= \$2743536.5

Investment Appraisal[9] Investment appraisal is a quantitative technique used to calculate the financial cost and benefits of an investment decision. The payback period– Works out how long it takes to repay the initial investment Net present value– This takes into account the time value of money. It is based on the principle that money is worth more than it is in the future. Investment Project A: Foundry pig iron[10]

 Investment \$2500000 Interest 6%
 Month Cash flow (\$) Cumulative cash flow (\$) Discount factor[11] Present value April 424957.5 424957.5 0.943 400734.9225 May 463590 888547.5 0.943 437165.37 June 500505.5 1389053 0.943 471976.6865 July 442127.5 1831181 0.943 416926.2325 August 173417 2004598 0.943 163532.231 September 370872 2375470 0.943 349732.296 October 566610 2942080 0.943 534313.23 November 585497 3527577 0.943 552123.671 December 613827.5 4141404 0.943 578839.3325 January 533557.75 4674962 0.943 503144.9583 February 505227.25 5180189 0.943 476429.2968 March 480760 5660949 0.943 453356.68 Total 5660949 – – 5338274.907

Payback Period= 6 months = 6 months and 6.8 days 2838274.907 Investment Project B: HMS (High Mild Steel Scrap) [12]

 Investment \$2200000 Interest 6%
 Month Cash flow (\$) Cumulative cash flow (\$) Discount factor[13] Present value April 461151.6 461151.6 0.943 434865.9588 May 499653 960804.6 0.943 471172.779 June 506142 1466946.6 0.943 477291.906 July 508737.6 1975684.2 0.943 479739.5568 August 245284.2 2220968.4 0.943 231303.0006 September 514794 2735762.4 0.943 485450.742 October 584010 3319772.4 0.943 550721.43 November 517389.6 3837162 0.943 487898.3928 December 472399.2 4309561.2 0.943 445472.4456 January 483646.8 4793208 0.943 456078.9324 February 428274 5221482 0.943 403862.382 March 428274 5649756 0.943 403862.382 Total 5649756 A­- – 5327719.908

 Project A- Pig Iron Project B- HMS Profit \$3160949 \$3449756 Payback Period 6 months + 6.8 days 4 months + 28.4 days NPV 2838274.907 3127719.908

The table above gives an overview of the investment appraisal I have calculated. The payback period for project B is shorter than project A. This suggests that project B will take less time to earn enough profits to repay the cost of the initial investments. Therefore project B is more liquid, and less risky as it allows the company to recoup the investment sooner, so they can reinvest the money elsewhere. Moreover, with a shorter payback period, there’s less of a chance that the economy, exchange rates, market conditions, or other factors affecting this project will drastically change. This method is the simplest way of comparing investment projects in order to identify which project yields a quick return for the business. However, this method ignores the total revenue on the investment projects and the time value of money.[16] To overcome this problem I have calculated the net present value of these two projects, as it considers the time value of money. The net present value method will help the company find the present value in today’s dollars of the opportunity cost of money and future netcash flow of the projects. NPV analysis is used to evaluate the project’s cash flows, rather than the revenue from the project. This is because “NPV does not consider depreciation as it is not an out-of-pocket expense”[17] . In this case the opportunity cost is the interest rate which is 6%. Both the projects are giving positive outcomes; this suggests that both the projects are profitable for the company. As Project B has a greater difference between NPV and cost than project A, it is advisable to choose project B. Conclusion and Evaluation In answering the question “Should PT.Kabitama Chem Tex invest on foundry pig iron or HMS (High Mild Steel Scrap) in order to expand its metal business?” This paper clearly delineates the extent of its effectiveness by analysing the SWOT, investment appraisal and decision tree of these two metal products. This paper should help Kabitama in deciding the best investment project for expanding their metal business. Overall, on the bases of the investment appraisal and decision tree, it is advisable for Kabitama to choose project B (HMS) as it has higher profit, lower payback period, higher net present value and a very high net expected value then project A (Pig Iron). But these are only the quantitative decision making techniques, in order to decide the best option it is important to also consider the qualitative side (non-financial factors). Which are[18]:-

• The aims of the organisation- if Kabitama’s aim is to earn maximum profit then it will focus on the results of investment appraisal,
• Reliability of the data
• Risk- this project can be a risk if the data is wrong as the calculations will be wrong which may lead to a wrong decision. Kabitama may prefer to choose a lower but more certain return.
• The Economy- Interest rates will have a major impact. If interest rates are increasing, any investment will be required to provide a greater profit. Future economic changes, such as a recession or boom, must be considered in the predictions of future costs and revenues.
• Image- Kabitama should consider how this project might affect its image and public relations
• Ethics- as Kabitama has a genuine commitment to trading ethically; the company should also consider this factor.

So to decide which project is the best, the company should research more on the qualitative factors of investment appraisal technique and other non-financial factors. The company should also include more metal products in their research department, this will help the company in choosing the best metal product to invest and expand their mental business. It may also be useful to adopt other methods of investment appraisal such as the Accounting Rate of Return, which is less sensitive to fluctuations in future cash inflow. This way, with more information, Kabitama will be able to see the advantages and disadvantages of each project more clearly. This will result in reducing the risk factor and there will be a higher possibility for the investment to be a success.

[1] Appendix 1- Parekh, Manish. Personal interview. 22 Feb. 2013. [2]”Textiles Industry in Hong Kong | HKTDC.”Textiles Industry in Hong Kong | HKTDC. 14 Apr. 2013 <https://hong-kong-economy-research.hktdc.com/business-news/article/Hong-Kong- Industry- Profiles/Textiles-Industry-in-Hong-Kong/hkip/en/1/1X000000/1X0040EM.htm>. [3] Appendix 3– Wira, Himawan. Personal interview. 5 Apr. 2013. [4] Appendix 1- Parekh, Manish. Personal interview. 22 Feb. 2013. [5] Appendix 1- Parekh, Manish. Personal interview. 22 Feb. 2013. [6] “Indonesia Population 2013.”- World Population Review. Web. 08 Mar. 2013. <https://worldpopulationreview.com/countries/indonesia-population/>. [7] Appendix 3- Wira, Himawan. PT.Kabitama Chem Tex Financial data on metal products. 5 Apr. 2013. Raw data. Indonesia, Jakarta. [8] Clark, Paul.Business and Management: Course Companion. Oxford: Oxford UP, 2012. Print. [9] Clark, Paul, Peter Golden, and Mark O’Dea.IB Business and Management. Oxford: Oxford UP, 2009. Print. [10] Appendix 3 & 4– Wira, Himawan. Personal interview. 5 Apr. 2013.

• Wira, Himawan. PT.Kabitama Chem Tex Financial data on metal products. 5 Apr. 2013. Raw data. Indonesia, Jakarta.

[11] Appendix 5- Brealey, Richard A., Stewart C. Myers, and Franklin Allen. “. “Principles of Corporate Finance. 8th ed. McGraw-Hill Irwin companies page 1.PRESENT VALUE TABLES. 10 Apr. 2013 <https://jcooney.ba.ttu.edu/fin3322/Brealey Files/Appendix A – Present Value Tables.pdf>. [12] Appendix 3 & 4– Wira, Himawan. Personal interview. 5 Apr. 2013.

• Wira, Himawan. PT.Kabitama Chem Tex Financial data on metal products. 5 Apr. 2013. Raw data. Indonesia, Jakarta.

[13] Appendix 5- Brealey, Richard A., Stewart C. Myers, and Franklin Allen. “. “Principles of Corporate Finance. 8th ed. McGraw-Hill Irwin companies page 1.PRESENT VALUE TABLES. 10 Apr. 2013 <https://jcooney.ba.ttu.edu/fin3322/Brealey Files/Appendix A – Present Value Tables.pdf>. [14] Appendix 1&2- Parekh, Manish. Personal interview. 22 Feb. 2013. [15] “Decision Trees.”Decision Tree Analysis. Web. 19 Dec. 2014. <https://www.mindtools.com/dectree.html>. [16] Clark, Paul, Peter Golden, and Mark O’Dea.IB Business and Management. Oxford: Oxford UP, 2009. Print. [17] “Winmark Business Solutions.”WBS Online. Web. 12 May 2013. <https://www.wbsonline.com/resources/net-present-value-of-major-purchases/>. [18] “Accounts and Finance.”Investment Appraisal. Web. 21 May 2013. <https://www.gregglee.biz/ftp/student/Finance/page_28.htm>.

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Should PT.Kabitama Chem Tex invest on foundry pig iron or HMS (High Mild Steel Scrap) in order to expand its metal business?. (2017, Jun 26). Retrieved June 29, 2022 , from
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