W6.1_Candra Nugraha_BUILD OR ACQUISITE


Opportunity Statements

Many investors consider that the business investment opportunities are great ways to maximize their returns. Usually, the experienced investors, who have a good eye for business opportunities, are looking for those options that ensure superior returns of their investments.

Root Cause

The two options are available to evaluate the opportunities of investment whether building a new plant (Project A) or an acquisition of a competitor’s existing plant (Project B).

Develop Alternatives

Project A investment at US$ 7,650 Million

Project B investment at US$ 10,000 Million 

Since the Project A is building a new plant, a comprehensive review of Capital & Operating Expenditures, Tax, revenue generating, etc has to be developed as per below table:

Development of the outcomes

Calculating the Net Cash Flow (NCF) and Pay Out Time (POT) for both Project A and B as per below tables for a 7 years life time:

Project A 

 

Project B

Minimum Acceptable requirements

The criteria of economic selection are:

  • The Fastest Pay Out time.
  • The biggest Rate of Return.  
  • NPV calculated at 10% Discount.
  • The biggest Discounted Profitability Index (DPI)

Analyze and compare the alternatives

Develop preferred alternative

Using another method, based on the Discounted Profitability Index (DPI) as per given formula:

DPI = 1 + (NPV @ 10% of Net Cash Flow / NPV @ 10% of Investment)
 
DPI for :
Project A = 1 + [2,795.81 / (1,500.00 + 6,150.00 x 0.9091)] = 1.39
Project B = 1 + (3,568.60 / 10,000.00) = 1.36
 
Hence :
Select Project A

 Monitor and Evaluation (Post Mortem)

Since building of a newt plant will require strong project management skill to achieve as per economic calculation compare to acquisite existing plant, the success factors below shall be fulfilled:

  • Good team work & coordination – meet on regular basis, good cross functional participation and good team commitment.
  • Follow the project management practices.
  • Follow HES procedures and approved standards & codes.
  • Utilize VIP’s & Best Practices.
  • Involve the right resources (e.g., contract development).

References:

  • Sullivan, William G., Wicks, Elin M. & Koelling, C. Patrick (1942), Engineering Economy 15th Edition, Singapore: Prentice Hall, Inc.
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About Candra Nugraha

I'am living in jakarta, indonesia
This entry was posted in Candra Nugraha, Week #6. Bookmark the permalink.

One Response to W6.1_Candra Nugraha_BUILD OR ACQUISITE

  1. DrPDG says:

    Awesome, Mas Chandra!!! I LOVE IT!

    Keep up the great work and for future postings, I would really love to see you doing something out of Chapter 8….. I am growing increasingly worried that any project estimates are going to be grossly UNDER estimated due to the inflation factors which seem inevitable.

    What I am curious about is whether the rising price of oil will be sufficient to cover the or justify increased cost of the projects? Asked another way, will the rising cost of oil be greater than or less than the net adjusted inflation rate?

    Either way, some very interesting opportunities to really apply what we are learning.

    Keep up the excellent work and your leadership by example!!

    BR,
    Dr. PDG, Jakarta

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