OPERATION PLAN

Tujuan Pembelajaran Umum :

Mahasiswa memahami secara umum bagaimana kegiatan operasional sebuah perusahaan.

Tujuan Pembelajaran Khusus

Mahasiswa mampu menjelasakan kebutuhan lokasi, gedung dan persediaan untuk kegiatan
operasional sebuah perusahaan.

8.1 Business Operation

The types of operational and organizational issues depend on the type of business to be
operating. For example, a building contractor has to be very well organized in all
matters of project planning and control. A trader in tropical fruits has to plan carefully
storage, transport and distribution.

The sections below discuss some of the most important operational and organizational
issues that need to be covered in a business plan.

a. Location

In this part of the business plan, you should explain the considerations that made you
select the present location of your business. Specific questions to be answered are:

Local market.
 A market for your products or services in the region
 Suitable place in which to produce.

Availability of workers.
 The vicinity skilled managers, specialists or workers whom you need to operate the
business.
 Any plans for industrial development programmes that are likely to strongly compete
with your business for human resources?
Do you see any critical limitations in this respect?

Living conditions.
 Suitable infrastructure and appropriate services available to employees, visitors and
their families for living and working in the region (Housing, shopping facilities,

1
 restaurants, hotels, schools, hospitals, religious centres, cultural and recreational
centres, etc.)

Supporting services.
 Availability of the necessary services to support your operations in the region (Law
and accounting offices, repair and maintenance workshops, suppliers of
consumables, etc.)

Material supply.
 Raw materials, components, spare parts and other supplies readily available in the
region

Utilities.
 The necessary utilities to accommodate the present and future expansion needs of
your business available at your location (Electricity supply, gas supply, water for
industrial use and cooling, adequate telephone lines, sink for discharges of effluents,
waste depositories, etc.)

Cost of premises.
 Cost of premises and utility rates compared with those in other areas
 Can you get a similar site on more advantageous terms in another area?

Transportation.
 How easily can your location be reached?
 What means of transportation are available? (Road, rail, ship, aeroplane, etc.)
 Is the cost in transportation of raw material and finished products reasonable? Is there
any risk that an increase in transportation costs could harm the competitiveness of
your business?

2
Future development.
 Any plans for changes or projects in the region that may affect your business?
(New housing complexes, new motorways, expansion of industry, etc.)
 Will these changes have beneficial or detrimental effects?

Local authorities.
 Do the local authorities support the development of business in the area?
 Do they provide any special incentives such as local tax reductions, training
schemes for employees and attractive conditions for leasing land and buildings?
 Are the local regulations reasonably flexible?
 Are procedures for obtaining permits and licences efficient enough?

Site accessibility.
 Can the site be accessed easily by employees and clients?
 Is the transport of materials and goods practical?

b. Premises
A business operations can be performed in an efficient and effective if supported by
the appropriate production facilities, storage space and office infrastructure. So
briefly describe the premises and their suitability for the business.

Licences.

Can the premises be utilized

 Need any application to the local authorities
 Need any structural alterations? If so, a permit may be required. Did you apply
for it? Have you received it?

Layout.
 The layout and the architectural design appropriate to performing the daily
operations in an efficient way?

Optimum flow:
- personnel and materials
- short transport distances
- adequate storage capacity
- appropriate working environment
- etc.
Representation.
 The appearance of the premises match the type of the business and the image of
the business type?

Expandability.
 Are the premises of appropriate size?
 Can you expand if necessary?
 Do you have already have to bear the extra costs of renting more space that you
may need in the future?

Safety regulations.
 Will the premises comply with fire, health and safety regulations?

Environmental issues.
 Do you have proof that the site you are going to buy or lease is environmentally
sound and that there is no existing contamination and liabilities from the past?

If you are not sure, an environmental survey has to be carried out.

Buy or rent.
 Are you planning to buy or to rent the premises?
 What are the considerations for this decision?

c. Manufacturing
If you are in the business of manufacturing products, your business plan should
include a section on the manufacturing process. Important issues to be covered are:

Make or buy.
 Which parts of the product do you make yourself and which parts do you
purchase?
 Do you make the final assembly of the product yourself or do you contract it
out?

Manufacturing process.
 Briefly describe the different stages of the manufacturing process and the flow
of materials and goods.
 Begin with the preparation of raw materials and continue to finishing and
packaging the end product.

Major equipment.

4
 What plant and major equipment will you need and what are the main
specifications? (Rated capacity, spare capacity, sizes, power consumption, etc.)

Layout.
 Provide a rough layout sketch of your manufacturing unit, showing the ground
plan and main dimensions of the facility and the arrangement of the main
equipment.

Resources and services.

 Which resources and services are required in order to keep the manufacturing
line running (energy and cooling media, maintenance service, engineering
support, spare parts, etc.)

Quality factors.
 What are the critical factors in achieving the required quality of the end product?
(Type of production machinery used, adjustments and manual control of the
production line, testing/inspection of the final product, etc.)
 What measures are you envisaging to ensure the quality of the final product?

Interruption risks.
 What are the probable incidents (machinery breakdown, etc.) that could lead to
interruption of production?
 How long could interruptions last?
 What are the necessary measures for resuming production?

Costs.
 Is the chosen distribution channel cost-effective for the type of products,
quantities and markets that you are targeting?
Mark-up.
 Can your product bear the mark-up required by the distributors?
 If you are distributing your products through shops in foreign countries you have
to assume that the shops will add a mark-up of say 100 per cent. The importer
may require another 20-30 per cent. On top of this, transportation costs, import
duties and so forth have to be added. Can your products be sold at a price that
includes such mark-ups?

Packaging.
 Is the packaging of your product suitable for the distribution and transportation
channels that you have chosen?
 Can you be sure that the product reaches the client in a perfect condition?
 The more stages in the distribution channel and the more loading/unloading, the
more robust your packaging has to be.

5
d. Order processing and inventory control
An important link between manufacturing and selling is the internal work of your
firm in:

 processing the client orders and

 controlling the inventory of finished products.

Registering orders.
 How is a new client order entered into the company system by the sales
department?
 Who takes on the responsibility for delivery in accordance with to the terms and
conditions agreed with the client?
 What are the interfaces and how are the responsibilities split between the
salespeople and the people producing the product and delivering it to the client?

Client satisfaction.
 What procedures do you apply to monitor whether the client is satisfied with the
product or service?

Inventory control.
 What mechanisms and schemes do you apply to control the inventory of your
products?
 How do you optimize the inventory to ensure that it is not too much (binding
cash and occupying a lot of storage space) or too little (reducing flexibility to
supply clients fast enough).

6
 BAB IX. FINANCE FOR SMALL BUSINESS

Tujuan Pembelajaran Umum :

Mahasiswa mampu memahami tahapan penyusunan rencana keuangan sebagai bagian

penting dari Business Plan.

Tujuan Pembelajaran Khusus

Mahasiswa mampu membuat Cash Flow, menyusun proyeksi laporan keuangan, serta
menganalisa kelayakan keuangan sebuah Business Plan.

A. Financial Capital

Source of capital is a source of funds that can be used on business. The selection of the
source of funds aims to provide the combination of the lowest cost, and does not cause
liquidity difficulties for the company and investors. Sources of company capital can be
grouped as follows:

1. Proprietary's Stake
Proprietary's stake is the source of funds invested by business owners. The companies
(Private Company) that have not to go public then can only obtain capital from the owners
and limited funds. Therefore, the companies that want to raise large funds they may choose
to go public or be a Listed Company / Publicly-traded. The Listed Company / Publicly-
traded in Indonesia have marked by “Tbk” behind the company's name, example: PT.
BANK RAKYAT INDONESIA TBK. Some sources of funds are grouped in proprietary's
stake is as follows:

 Profit reserves
 Retained earning
 Donated capital
 Grant funds

7
 2. Loan Capital
The source of loan capital is the source of funds derived from non-operational
activities such as debt to the creditor. Some of these loan sources come from legal of
financial institutions and informal financial institutions. Usually formal financial institutions
serve businesses with large scale. Small businesses such as SMEs are served by informal
financial institutions. Loan capital consists of:

 Loans from banks;

 Loans from financial institutions
 Loans from non-financial companies

B. Allocation of Capital

1. Type of Cost

In business, cost is usually a monetary valuation of (1) effort, (2) material, (3) resources,
(4) time and utilities consumed, (5) risks incurred, and (6) opportunity forgone in
production and delivery of a good or service. All expenses are costs, but not all costs
(such as those incurred in acquisition of an income-generating asset) are expenses.

Cost can be grouped as follows:

1) Based on Expenditure

The name of Expenditure or is basic of classification cost to recognize of purpose

the cost utilization. For example, the name of expenditure is ‘transportation cost’.
It means that the company will use funds for transportation activities funding.

2) Based the main function of the Company

In manufacturing companies there are three main functions, namely production

function, marketing function, and administrative and general functions. Therefore,
costs can be grouped into three groups:

a. Production cost is costs incurred to process raw materials into ready-made

products for sale. The production costs are divided into:
 Raw material cost
the cost of raw materials used in product processing activities.
 Direct labor cost
the remuneration provided by the company, to the direct labor and its
benefits can be identified to a particular product.
 Manufacture overhead cost

8
 Indirect manufacturing costs or manufacture overhead cost are all costs used
to convert raw materials into finished products, in addition to raw materials
and direct labor costs.

b. Marketing expenses is costs incurred to carry out product marketing activities.

Examples of these costs are advertising costs; promotional costs, freight costs
from the company warehouse to the buyer's warehouse; salaries of employees
of parts conducting marketing activities; sample cost (sample).

c. General and administrative expense is costs incurred for production and

marketing activities. For examples are the cost of the employee's salary, the
cost of photocopy, the cost of office stationery.

3) Based on Cost Relationship with Funded Objects

a. Direct cost, is a price that can be completely attributed to the production of
specific goods or services. In relation to the product, direct costs consist of raw
material costs and direct labor costs.
b. Indirect cost, is costs that are not directly accountable to a cost object (such as
a particular project, facility, function or product). Indirect costs may be either
fixed or variable. Indirect costs include administration, personnel and security
costs.

4) Based on Behavior in Relation to Volume of Activity

a. Variabel cost, those costs that vary depending on a company's production
volume; they rise as production increases and fall as production decreases. For
example, raw material cost and direct labour cost
b. Fixed cost is a cost that does not change with an increase or decrease in the
amount of goods or services produced or sold. Fixed costs are expenses that
have to be paid by a company, independent of any business activity.
c. Mixed costs consist of a fixed component and a variable component. The
annual expense of operating an automobile is a mixed cost. Some of the
expenses are fixed, because they do not change in total as the number of
annual miles change. Think insurance, parking fees, and some depreciation. In
other word, costs that are affected by the volume of corporate activity but not
proportionately. Most of the cost of the activity mix changes with changes
proportionally. Meanwhile, others have not changed despite changing activity
levels.

5) Based on Duration of use

a. Capital expenditure is the cost of which has a period of use of more than one
accounting period. For example: expenses for the purchase of fixed assets, for
large repairs to assets, depreciation expenses, amortization costs.
b. Revenue expenditure is costs which have a term of use in the accounting period
of the expenditure incurred. For example: advertising costs, labor costs.

2. Pre-operation

9
Some aspects to be considered for an employer in order to survive in the market is the
business market and marketing, technical-production, management, legal, economic,
social and financial. In this part we will discuss the financial aspects that are the result of
the planning corporate strategy because it determines the funds needed by the company
and an investment decision (external funding).

For the company, especially the newly established will certainly have a lot of costs to be
spent before the business is run so it is important to arrange the allocation of funds. If
that happens, the company must decide and even create a cost list based on the level of
its needs.

Table 10.1. Business Financing Pre-Operation Period

(in Rupiah)
Description Sum of Funding
Fixed Assets
Building
Machine and equipment
Office Supllies
.................................
Total Fixed Assets .....................
Intangible Assets
Pre-operating Cost
...............................
Total Investment Cost .....................
Working Capital .....................
Total Project Cost .....................

After determining the Costs required, the financial manager will determine the source of
funds used to meet such costs such as using his own capital or loan. The statement of
source and application of fund is necessary as it will affect the cash flow statement. The
managers need to pay attention to the source of funds from the loan because it affects the

10
cash flow out so you need to know how long and the amount of the loan as it will be a
deduction of cash.

3. Operational
Working capital for new investment business refers to the overall assets that will be used
for operations other than the expenditure of funds for fixed assets. The bigger the
planned amount of sales and production the greater the working capital needed. The cost
used for working capital or company operations is the amount of funds used to run the
business activities that are running. Operational costs (working capital) include purchase
of raw materials, purchase of supplies, employee salaries, wages, electricity costs,
telephone costs, water, maintenance costs, taxes, insurance premiums, marketing costs,
and other expenses

Table 10.2. Operating Costs and Working Capital Needs

(in Rupiah)
Cost Per-Year
Description Total
Needs

Production plan (units)

A. Cost of Production

1. Raw materials and auxiliaries ......................

2. Production salaries expense ......................

3. General production expense .......................

Total Cost of Production ……………..

B. Operating Expenses

1. Director/manager salaries expense ......................

2. Head of marketing and sales salaries ......................

expense

3. Head of production salaries expense .......................

4. General and administration expense ......................

5. Marketing and sales expense ......................

11
 6. Office supplies .......................

7. Rent expenses ......................

8. .................................................. ......................

Total Operating Expenses ......................

Total Operating Cost Per year (A+B) ......................

Needs Working Capital .......................

(..................x Rp........................)

C. Pro-forma of Financial Statement

The financial aspect of the business proposal should be able to demonstrate the potential
of the funds, external funding needs, business feasibility calculations, including the three
financial performance reports: balance sheet, profit-loss, and cash flow. The estimated
financial statements can provide information about projections of business results
obtained from the business to be run.

1. Pro-forma of Profit and Loss Statement

The projected income statement describes the estimated financial statements in the next
year and is the result of operations within a certain period. These financial statements
reflect the types and sources of income and the amount of income as well as the types of
costs and the amount of costs projected to be incurred.

Table 10.3. Proforma of Profit and Loss

Operating Period
Description
Year 1 Year 2 Year 3

Production plan (units)

A. Sales

B. Cost of Goods Sold

1. Raw materials and auxiliaries ………… ………… …………

2. Production salaries expense ………… ………… …………

3. General Production Expense ………… ………… …………

C. Gross Profit (A-B) ………… ………… …………

12
D. Operating Expenses

1. Director/manager salaries expense ………… ………… …………

2. Head of marketing and sales salaries ………… ………… …………

expense

3. Head of production salaries expense ………… ………… …………

4. General and administration expense ………… ………… …………

5. Marketing and selling expense ………… ………… …………

6. Office supplies ………… ………… …………

7. Rent expenses ………… ………… …………

8. .................................................. ………… ………… …………

Total Cost Before Depreciation and ………… ………… …………

Amortization

9. Depreciation* ………… ………… …………

10.Amortization** ………… ………… …………

E. Total Operating Expense ………… ………… …………

F. Operating Profit (C-E) ………… ………… …………

G. Interest Expenses ………… ………… …………

H. Profit Before Income Tax (E-G) ………… ………… …………

I. Income Tax ………… ………… …………

J. Net Profit ………… ………… …………

*/** To calculate the amount of depreciation and amortization required auxiliary

table

Table 10.4 Depreciation and Amortization Calculations

Depreciation Amount Economic Depreciation

1. Building ..................... Life
.................... per Year
.........................
2. Machine and equipment ..................... .
.................... .........................
3. Office inventories ..................... .
.................... .........................
4. Vehicle ..................... .
.................... .........................
.

13
 Amortization Amount Economic Amortization
Pra operation expense Life
..................... .................... per Year
.........................
.
1. Pro-forma of Balance sheet
The projection of the balance sheet shows the projection of the company's financial
position on a certain date that describes the position of assets (assets), liabilities and
capital expected in the future. The components of balance sheet will arrange based on the
level of liquidity and maturity.

Table 10.5 Pro-forma of Balance Sheet

Pre- Operating Period
Description Operating
Period Year 1 Year 2 Year 3

Assets
A. Current Assets
1. Cash
2. Account receivable
3. Inventories
Total Current Assets ................ ................. ................. .................
B. Fixed Assets
1. Land
2. Building
3. Machine and equipment
4. Office supplies
5. Vehicle
6. ............................................
Total Fixed Assets ................ ................. ................. .................
Accumulated depreciation
Book Value Fixed Assets
C. Intangible Assets:
Accumulated amortization
Book Value Intangible Assets ................ ................. ................. .................
Total Assets (A+B+C) ................ ................. ................. .................

Liability and Equity

A.Current Liabilities
1. Account Payable
2. Working capital credit
3...............................................
Total Current Liabilities ................ ................. ................. .................
B. Non-currents Liabilities
Investment credit

14
 ..............................................
Total Non-current Liabilities ................ ................. ................. .................
C. Equity
Equity
Retained earnings last year
Retained earnings for the year
Total Equity ................ ................. ................. .................
Total Liability and Equity ................. .................. ................. ................
(A+B+C)

2. Pro-forma of Cash Flow

Forecasting of Cash flow statement shows all aspects related to activities, either directly
or indirectly affecting cash. Projected cash statements should be prepared based on the
cash concept during the reporting period.

Table 10.6 Pro-forma of Cash FLow

Pra Operating Period
Description
Operating Year 1 Year 2 Year 3
Period
Sales (in Rupiah)
A. Cash Inflows
(Cash receipt)
1. Sales
2. Receipt from customers
3. Equity
4. Investment credit
5. Working capital credit
6. Cash at the beginning of the period
7. ...................................................
Total Cash Inflows ................. .................. .................. ..................
B. Cash Outflows
(Cash disbursements)
1. Investment
2. Cost of Goods Sold
3. Operating cost before depreciation
4.
andInterest Expenses
amortiazation
5. Tax
6. ..................................................
Total Cash Outflows
C. Netto Cash (A-B) ................. .................. .................. ..................
Surplus (Deficit)

15
D. Bank Borrowings
1. Installment of investment credit
2. Installment of working capital
3. ...............................................
Total Bank Borrowings ................. ................. .................. ..................
Cash at the end of period ................. .................. .................. ..................
Assumptions:

1 = Cash sales = ....% x sales

2 = Credit sales = ..% x sales

C. Time Value of Money

Time value of money (TVM) is the idea that money available at the present time is
worth more than the same amount in the future due to its potential earning capacity. This
core principle of finance holds that, provided money can earn interest, any amount of money
is worth more the sooner it is received.

The future value (FV) is the value of a current asset at a specified date in the future
based on an assumed rate of growth over time. The FV calculation allows investors to
predict, with varying degrees of accuracy, the amount of profit that can be generated by
different investments. The amount of growth generated by holding a given amount in cash
will likely be different than if that same amount were invested in stocks, so the FV equation
is used to compare multiple options.

Present value (PV) is the current worth of a future sum of money or stream of cash
flows given a specified rate of return. Future cash flows are discounted at the discount rate,
and the higher the discount rate, the lower the present value of the future cash flows.
Determining the appropriate discount rate is the key to properly valuing future cash flows,
whether they be earnings or obligations.

1. Terminal (Future) Value

The concept of this investment assessment takes into account interest on the principal of
the loan, and the interest will be the principal of the loan for the next period and the
interest for the next period is calculated on the basis of the new loan principal.

16
 The interest is paid or semi-annual compounding per six months,

2t
 rate of return 
FV  present value  1  
 2 

The interest rate is paid quarterly compounding or four times in one year then

4t
 rate of return 
FV  present value  1  
 4 

2. Present Value
Calculate of estimation of money must be invested now in order to get the desired funds
in the future period, then how to assess the money today is:

future value
PV 
1  rate of return 
t

D. Business Feasibility Analysis

In determining whether the planned investment can be implemented or not, it is necessary to

make an investment assessment based on several criteria, especially in the field of finance.
Based on these criteria it will be known the various risks of the investment. Several methods
of analysis that can be used are as follows.

1. Pay Back Period (PBP)

Payback period in capital budgeting refers to the period of time required to recoup the
funds expended in an investment, or to reach the break-even point. An investment
proposal will be approved if the payback period is faster than the payback period required
by the company or the owner of the fund that lends the funds for the company's use to
finance the investment.

Total Investment
Pay Back Period = --------------------------------------- x 1 year
Net Income + Depreciation

17
 Total Investment
Pay Back Period = --------------------------- x 1 year
Cash In Flow
Payback Period method is a very simple measuring tool, easy to understand and serves as
the earliest stage for the assessment of an investment. This model is commonly used for
the selection of investment alternatives that have high risk, because the capital that has
been invested should be immediately acceptable as soon as possible. The main
disadvantages of this PBP method are:

 Can not analyze business income after capital return.

 Does not consider the time value of money

Example:

Company plans to invest. Investment manager gives two project alternative. Alternative A
have terminal investment Rp 1000.000, - and expected to get profit or return of profit Rp
250.000, - per year with 10 year period. Investment B requires an investment cost of Rp
200,000, - and will not get a profit per year, the company will get its fund of Rp 100,000,
- annually which is accumulated in the next 20 years. Which will provide more benefits
for company?

PBP A = 1000.000 : 250.000 = 4 years

PBP B = 200.000 : 100.000 = 2 years

Based on the above calculation, it can be concluded that PBP investment A is longer than
B investment. In addition, rate of returns company, Project A give Rp.1500.000, -, where
the company spends Rp.1000.000 as the cost of capital to be returned during 4 years of
investment while Rp. 250,000 in the fifth to the tenth year is a return on investment.
While Project B will generate incoming cash plus capital cost of Rp.1.8 million, - which
will be accepted by the company at the end of the 20th year. Which investment is
interesting to you? (discuss with your group)

2. Net Present Value (NPV)

Net Present Value is the difference from the present value of cash inflow (cash inflow)
with the present value of cash outflow (cash outflow). NPV can be formulated as follows:

NPV = PV of Benefit – PV of Capital Cost, PV = (C / (1+i)n), so:

C –C
Σ +Σ 18
 NPV = ----------- -----------
(1 + i)n (1 + i)n

keterangan: i = interest every period

N = period (year, month)

- C = capital

C = proceed

The criteria used in the NPV assessment are as follows:

a. If NPV = 0 (zero), then the return on investment will be equal to the interest rate
used in the analysis, or in other words business is not profitable or loss (breakeven).
b. If NPV = - (negative), then the investment is a loss or the result (return) below the
interest rate used.
c. If NPV = + (positive), then the investment is in return or the result (return) exceeds
the interest rate used.

Example:

Project A Project B
At the beginning Rp. 1.000.000,- Rp.200.000,-
investment
Year Operational Cash Inflow
1 Rp. 250.000,- Rp. 100.000,-
2 Rp. 250.000,- Rp. 100.000,-
3 Rp. 250.000,- Rp. 100.000,-
4 Rp. 250.000,- Rp. 100.000,-
5 Rp. 250.000,- Rp. 100.000,-

The Company has a 10% capital cost, then how NPV is it?

Answer:

Formula Cash Inflow Cash Outflow

-CF 1000.000 200.000

CF 155,230.33 62,092.13
(1  r ) n
155,230.33 62,092.13

19
 155,230.33 62,092.13

155,230.33 62,092.13

(155,230.33) (62,092.13)

NPV 465,690.99 186,276.40

By Excel

A B C

1 Project A Project B

At the beginning
2 1000.000 200.000
investment

3 Year Operational Cash Inflow

4 1 250,000.00 100,000.00

5 2 250,000.00 100,000.00

6 3 250,000.00 100,000.00

7 4 250,000.00 100,000.00

8 5 250,000.00 100,000.00

9 NPV (52,303.31) 179,078.68

10 Proyek yang dipilih Proyek A

11 NPV =NPV(10%,B4:B8)-B3

12 Proyek yang dipilih =IF(B9>B10,B1,C1)

3. Profitability Index (PI)

20
Profitability Index is the ratio between the present value of cash inflows to the present
value of outflow cash flow. This ratio uses the present value as well as the Net Present
Value, but the Profitability Index uses the index unit instead of the money value.

PV of Benefit
Profitability Index = ---------------------------
PV of Capital Cost

The criteria for valuation of investment by using Profitability Index are as follows:

a. If PI > 1, then the investment is said to be feasible

b. If PI <1, then the investment is said not feasible

c. If PI = 1, then the investment is said BEP

Example:

Based on the above example and discussion of NPV, how much the PI of each project?

Answer:

1 Project A Project B
At the
2 beginning 1,000,000.00 200,000.00
investment

3 Year Operational Cash Inflow

4 1 250,000.00 100,000.00
5 2 250,000.00 100,000.00
6 3 250,000.00 100,000.00
7 4 250,000.00 100,000.00
8 5 250,000.00 100,000.00
9 NPV ($52,303.31) $179,078.68
10 Proyek yang dipilih Proyek B
11 NPV
12 PI 1.25 2.5
13 IP=SUM(B4:B8) /B2

21
4. Internal Rate of Return (IRR)
Internal rate of return (IRR) is the interest rate at which the net present value of all the
cash flows (both positive and negative) from a project or investment equal zero. Internal
rate of return is used to evaluate the attractiveness of a project or investment. The
indicator used as a reference to the Internal Rate of Return is the prevailing bank lending
rate, or deposit interest rate.

IRR = i1 + (i2 – i1) x | NPV1

|
----------------------- x 100%
(NPV1 – NPV2)

NPV1 must be above 0 (NPV1 > 0)

NPV2 must be below 0 (NPV2 <0)

For Example:

Based on the sample problem in the above NPV discussion, how much IRR of each
project?

Answer:

1 Proyek A Proyek B
2 At the -1,000,000.00 -200,000.00
3 1 250,000.00 100,000.00
4 2 250,000.00 100,000.00
5 3 250,000.00 100,000.00
6 4 250,000.00 100,000.00
7 5 250,000.00 100,000.00
8 NPV ($52,303.31) $179,078.68
9 NPV
10 PI -1.25 -2.5
11 IRR 7.93% 41.04%
12 Proyek yang dipilih Proyek B
13 IRR =IRR(B3:B6)
14 Proyek yang dipilih =IF(C11>D11,C1,D1)

E. Profit Analysis

Profit analysis is aimed at setting profit by adjusting price and sales volume received
by the market by considering competitors. Analyze this advantage should always be done at
a certain period.

1. Break Even Point (BEP)

22
 Break Even Point analysis is a method that connects between cost, profit, and sales /
production volume. This analysis is conducted to determine the minimum level of profit
that must be achieved and at that level the company does not experience any profit or
loss.

In the Break Even Point analysis, the cost factors are divided into:

 Semi-variable costs, ie costs that will change in number with changes in sales volume
or production, but not proportionately. This cost will be partially charged to the fixed
cost item, and some will be charged on variable cost items
 Variable costs, are costs that will change in proportion to changes in sales volume or
production
 Fixed costs are costs that will not change with changes in sales volume or production.

The BEP analysis is calculated by the following formula:

Fixed Cost
BEP = --------------------------------------------- x 100%
Sales – Variable Cost

Fixed Cost
BEP = --------------------------------------

| Variable Cost
1 – -----------------------
Sales
|
Example:

Sales (400 unit)(2.500) 1.000.000

Fix Cost Production 300.000
Variable Cost Production (400 unit)(1.000) 400.000
Total Cost 700.000
Operational profit 300.000

Calculate break-even point in rupiah and in unit!

Fixed Cost
BEP = --------------------------------------------- x 100%
Sales – Variable Cost

23
 300.000
BEP = --------------------------------------------- x 100%
1.0.0 – 400.000

Then the value of BEP in rupiah is Rp 500,000

24
Hence the value of BEP in units is as many as 200 units

2. Return on Investment (ROI)

Return on Investment is a measure of the company's overall ability to generate profits
with the total assets available within the company..

Earning After Tax

Return on Investment = ------------------------------------ x 100%
Total Assets/Investment

Example:

1. The investment used for a business is Rp. 800,000,000 and the net profit
earned is Rp. 20.000.000 per month. Calculate how the Return on Investment on the
investment!

Answer:

Then the value of ROI per month 2.5% or 30% per year

2. Given the benefits and costs incurred from a project as follows:

Benefit thn 1 = Rp. 68.000.000
Benefit thn 2 = Rp. 88.000.000
Benefit thn 3 = Rp. 113.000.000
Benefit thn 4 = Rp. 125.500.000
Total Benefit = Rp. 394.500.000
cost thn-0 = Rp. 83.000.000
cost thn-1 = Rp. 22.200.000
cost thn-2 = Rp. 43.500.000
cost thn-3 = Rp. 15.800.000
Cost thn-4 = Rp. 57.000.000
Total Cost = Rp. 221.500.000

Calculate what the total value of ROI for the project is!

Answer:

25
 Then the overall ROI value is 70,37%

Exercise

1. Here is the Cash Flow Per Year per Project

Initial Investment Project M Project N

(CF0) $28.500 $27.000

Year(T) Cash Inflow (Cft)

1 10.000 11.000
2 10.000 10.000
3 10.000 9.000
4 10.000 8.000
a. Calculate Payback Period (PP).
b. Calculate the net present value (NPV) of each Project
c. Calculate the internal rate of return (IRR) of each Project
d. Describe the results Based on the assessment of the three models and decide
which projects to choose.
3. PT ABC uses a maximum PP standard of 6 years and chooses two alternative
projects. The Hydrogen project with a first investment of Rp 25,000,000, while the
Helium project requires 35,000,000. Both projects are estimated the company will
get cash inflow per year as follows.
YEAR EXPECTED CASH
HYDROGEN HEL
1 6000 7000
2 6000 7000
3 8000 8000
4 4000 5000
5 3500 5000
6 2000 4000

Calculate PP of each project. Which projects are in compliance with corporate PP

standards
4. PT DEF gets the investment offer in its initial investment is 15 million and it is
estimated that the investment period for 10 years cash flow which will be accepted
by the company is as follows:

Year Cash Inflow

26
 1 600.000
2 1.000.000
3 1.000.000
4 2.000.000
5 3.000.000
6 3.500.000
7 4.000.000
8 6.000.000
9 8.000.000
10 12.000.000
a. Calculate Payback Period (PP).
b. Calculate the net present value (NPV).
c. Calculate the internal rate of return (IRR).

5. A convection company produces t-shirts and has cost data and production plans as
follows:
a. Fixed costs:
 employee salary + owner = Rp.35,000,000
 • health insurance fee = Rp.10,000,000
• office building rental fee = Rp.15,000,000
• factory rental fee = Rp.20,000,000
b. Variable costs:
• raw material costs = Rp.35,000
• direct labor costs = Rp.25,000
• Other fees = Rp.15,000
c. Selling Price per Unit = Rp.95,000.

Calculate BEP levels the business is in both units and in rupiahs!

6. A project is known to have the following benefits and expenses:

Benefit year 1 = Rp. 26.200.000 Cost year 0 = Rp. 68.400.000

Benefit year 2 = Rp. 34.600.000 Cost year 1 = Rp. 47.300.000
Benefit year 3 = Rp. 45.800.000 Cost year 2 = Rp. 43.800.000
Cost year 3 = Rp. 57.900.000

Calculate what the total value of ROI for the project is!

27
 DAFTAR PUSTAKA

1. Kotler, (2015), Principles of Marketing, McGraw-Hill

2. Longenecker, et.al. (2008), Small Business Management – An Entrepreneurial
Emphasis, 14th Edition, South-Western
3. Barringer and Ireland (2015), Entrepreneurship: Successfully Launching New
Ventures (4th Edition) , Pearson College Division.
4. Saefulloh, D (2013), Comparing Youth Entrepreneurship Education With
Entrepreneurs’ Learning In Indonesia, Unpublished Doctoral Thesis, University of
Lincoln UK.
5. UNCTAD, How to prepare your Business Plan, available from :
https://www.pdfdrive.net/how-to-prepare-your-business-plan-unctadorg-home-
e836063.html [Accessed 19th August 2017].

28
 LAMPIRAN

1. Rencana Pembelajaran Semester Kewirausahaan (RPS)

29