Question
Mr. Sugeng is the Head of Corporate Investment in PT Aneka Pakaian located in Surabaya. PT Aneka Pakaian currently produces casual clothes. As part of
Mr. Sugeng is the Head of Corporate Investment in PT Aneka Pakaian located in Surabaya. PT Aneka Pakaian currently produces casual clothes. As part of its expansion, the firm is currently considering opening a pilot project producing Rompi in Semarang for the national market. If Semarang's pilot project is successful, the firm will expand multiple Rompi business units for the global market. Mr. Sugeng is responsible for evaluating this proposed pilot project based on capital budgeting principles. Mr. Sugeng realizes that the firm shall immediately pay for the area (7-years contract, full paid in advance for Rp 430.000.000,- minus rebate Rp 30.000.000,-). The firm shall also invest in special designed building (Rp 300.000.000,-, depreciable 10 years and straight-line method) and machine (Rp 100.000.000,-, depreciable 10 years and straight-line method). Mrs. Dahlia, the firm's market analyst, forecasts that the firm can expect to sell 2.500 Rompi units at Rp 150.000,- per unit in the first year. Then, she reasonably expects that the firm can charge an annual increment selling price for 8 percent per annum with an annual 3 percent increment units sold. She notes that, however, the market of Rompi will end at the end of the 7th year because of clothing trend changes. Mr. Boy, the firm's accountant, informs that the operating expenses (excluding depreciation) are expected to be steady at around 40 percent of sales revenues. He points out that the building and machine shall be destroyed at the end of Rompi production due to the confidentiality issue. He further explains that the firm shall invest Rp 30.000.000,- additional working capital and expect to recover Rp 15.000.000,- at the end of Rompi production. In the meeting, Mr. Sugeng presents that the PT Aneka Pakaian's marginal tax rate is 25 percent, and the nominal discount rate is 13 percent. Mr. Sugeng also refers to Biro Pusat Statistik regarding the 10 percent annual inflation in Semarang. Required: a) Evaluate whether PT Aneka Pakaian shall invest in the Rompi pilot project! Your analysis must refer to capital budgeting techniques. Please write reasonable assumptions and reasons in your calculations. (35 points)
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