PT Green Dragon Multi (PT. GDAM) has rapidly become one of the most innovative agri-based companies in Indonesia. Established only in 2010, the company started out from the acquisition of an old run-down medium sized palm oil plantation located in remote part of West Sulawesi. Immediately aware of the need to differentiate and distance itself from the negative image of the palm oil industry and the adverse environmental impact it creates; the management of PT. GDAM made it a mission and strategic commitment to follow sustainable palm oil production program. This core value continues to be in focus throughout their business development and operations. The successfully implement a full and comprehensive range of policies, initiatives and action plans, all of which are complying to the highest level of business, social ethics as well as environmental practices and standards. The condition has reflected positively, gaining excellence in all core aspects of the companys business metrics for performance and growth. Within the short 10-year period, besides completing a full turnaround of its business, the company also greatly expanded its presence.

Starting from only owning a single palm oil plantation business, it has now become a fully diversified and integrated agri-based industrial entity. Its business now ranges from research & development, oil palm seed breeding, oil palm cultivation and milling, and include downstream business refining, branding and marketing of cooking oil, margarine, shortening and other palm oil derivative products. Worthy appreciation has been obtained from all stakeholders including positive acknowledgment from major consumers and environmental advocacy groups which are usually very critical to the palm oil industry. Recent developments in global trade relationship, ecological and environmental dynamics as well as the devastation of health and social economic conditions caused by ongoing COVID19 pandemic has put extreme pressure to PT. GDAM business. The landscape of the economy and business environment has tremendously changed within a single year of 2020. Such unpredictable and extreme conditions had required the companys management team to immediately reassess the companys entire business strategy. As leading innovator in the industry, it has decided to leverage its capability to further advance into the green energy business sphere to drive its future growth and fully adapting to the new normal. In line with its focus to resolve the environmental issues PT. DGAM is exploring further business prospects, and to specifically participate in the Indonesian governments program for renewable energy development. The company sees a great opportunity to enter green energy business and reinforce the companys eco-management capabilities, to effectively reduce its environmental impact and increase its operating efficiency. Benefiting from its extensive reach and networking not only within the industry, but also the environmental and scientific communities both local and international levels, the Research and Development unit PT. GDAM had obtained a great breakthrough. As recognition, the company have recently received support and financial sponsorship from the International Green Energy Consortium (IGEC) to host two important Pilot Projects on the use of new technologies in the form of independent Renewable Energy Project Grant. PT. GDAM management is greatly honored to receive the support and endorsement, indicating that the Pilot Projects will be attached to two of company Plantation optimizing projects in Sulawesi, namely at Project A at the MRH Plantation (MRHP) and Project B the MIH Plantation (MIHP). Scope of these two technologies is further detailed below introductory profiles to be used only for illustrative purposes.

Project B: MIH Plantation (MIHP) Plantation Optimization Project B MIH Plantation (MIHP) will run a parallel Plantation Optimization program, at their site. Scale of CPO mill at MIHP is significantly smaller than the capacity of the MRHP, having designed maximum daily capacity of only 270 tons of Palm Oil Fresh Fruit Branch (FFB). Productivity of the plantation is still below target but from results of the new palm oil tree replanting this will be significantly improved from the present harvest rate of 210 tons of FFB per day. Yield of the FFBs from these plants is expected to rise annually by 5 pct. The MIHP managers must evaluate the efficiency of maintaining existing machinery of their CPO mill had been purchased three years ago at a cost of IDR 18 billion and they are unsure meet future increases of the production budget. To assist in their evaluation, they have engaged the Technical Support team from Head Office to develop the proposal to replace the machinery. Latest report indicates that the existing machinery can only be a sold at an auction for a price of IDR 150 million. The current machine will have no market value at the end of its economic life. The same group of suppliers and contractors have been contacted by PT. GDAM procurement team received best quote through tender of IDR 28 billion as the base cost of the total replacement machinery and related hardware for PT. MIHP. Charge of 12 percent will be added on to this amount as part of the Turn-key project scope involving the technical design ,construction, installation and commission services; until ready for handover and production run. After the project ended, the team expected the market value of the proposed machines null.

PT. GDAM management brought in the marketing, production management, procurement, capital investment, and accounting department to formulate estimates of the initial cost of the expansion, as well as future cash flow that can be used to evaluate this expansion.

a. Should PT. GDAM replace the machines? Explain your reasoning. Provide complete analysis showing : initial investment, operating cash flows, terminal cash flow, as well as depreciation schedules, and using set of capital budgeting techniques

b. If PT. GDAMs cost of capital increases by 5 percent, would your recommendation change?

c. At what cost of capital, would your recommendation change? Indicate your decision on a net present value profile of this investment decision

maintenance requirement In order to complete the capital budgeting process, the local management at MIHP has provided the following operational and financial figures as well as planning baselines : No. 1. Value Info Current daily FFB processing capacity 205 ton using existing machinery Remarks reducing of 2 % annually due to 2. 2 ally Proposed daily FFB processing 210 ton capacity using new machinery Number of production days per year 3. 360 days 4. Net CPO extraction rate 15 % 5. Average CPO price per kg (loco plant) IDR 8900 Increase of 5% annually Plant running 360 dave days per year 1000 kg FFB will produced 150 kg CPO Increase of 2% annually Increase of 2% annually Increase of 5% 5 annually Increase of 3% annually 6. Fixed operational cost using new IDR 20 billion machinery Fixed operational cost using existing IDR 21 billion 7. machinery 8. 9. 10. 11. 12. 13 Variable operational cost per kg of IDR 6500 CPO same for existing & new machinery Corporate Tax rate 35% Cost of capital 15% Change in working capital IDR 16 billion Depreciation method MARCS Project period Economic life: Present machine 5 years Economic life: Proposed machine 10 years 10 years 14. 15. maintenance requirement In order to complete the capital budgeting process, the local management at MIHP has provided the following operational and financial figures as well as planning baselines : No. 1. Value Info Current daily FFB processing capacity 205 ton using existing machinery Remarks reducing of 2 % annually due to 2. 2 ally Proposed daily FFB processing 210 ton capacity using new machinery Number of production days per year 3. 360 days 4. Net CPO extraction rate 15 % 5. Average CPO price per kg (loco plant) IDR 8900 Increase of 5% annually Plant running 360 dave days per year 1000 kg FFB will produced 150 kg CPO Increase of 2% annually Increase of 2% annually Increase of 5% 5 annually Increase of 3% annually 6. Fixed operational cost using new IDR 20 billion machinery Fixed operational cost using existing IDR 21 billion 7. machinery 8. 9. 10. 11. 12. 13 Variable operational cost per kg of IDR 6500 CPO same for existing & new machinery Corporate Tax rate 35% Cost of capital 15% Change in working capital IDR 16 billion Depreciation method MARCS Project period Economic life: Present machine 5 years Economic life: Proposed machine 10 years 10 years 14. 15