Investment Valuation of Crushing Station Upgrade to Support Coal Production in Pit Z using Discounted Cash Flow Method

: Pit Z at the Binungan site contains substantial coal reserves, estimated at around 10.77 million metric tons based on Life of Mine (LOM) data. The current issue involves the breakdown of the crusher unit at the crushing station during the processing of Pit Z coal. Further investigation revealed that the damage was caused by the Hardgrove Grindability Index (HGI) of Pit Z coal (29-36), which is lower than the crusher unit's specification (HGI ≥ 40). The HGI measures coal's resistance to crushing; the lower the HGI value, the harder the coal is to crush. This study aims to evaluate the financial feasibility of constructing a New Crushing Station, utilizing the Discounted Cash Flow (DCF) method with incremental cost analysis. The construction of a new crushing station yields the following financial parameters: NPV of Rp. 60.236 billion, Profitability Index (PI) of 2.69, IRR of 61.65%, Payback Period of 1.63 years, and Discounted Payback Period of 1.81 years. Sensitivity analysis indicates that coal production is the most sensitive parameter affecting NPV, with a ±20% change in this parameter resulting in a ±33.69% fluctuation in NPV. Additionally, Scenario Analysis and Monte Carlo Simulations reveal that the worst-case scenario produces an NPV of Rp. 54.581 billion, the best-case scenario an NPV of Rp. 64.498 billion, with a 0% probability of NPV < 0, and a 47.28% probability of NPV exceeding the Base Case. This study suggests that constructing a new crushing station is financially viable with manageable risk.


INTRODUCTION
Indonesia is one of the world's largest coal exporters.In 2019, Indonesia's coal export reached 454 MT with a value of US$21.5 billion.Coal exports increased for 4th consecutive year in 2019; China and India are Indonesia's two major coal export destination countries.Indonesia coal reserves accounted for 2.2% of total world reserves (BP, 2018).Indonesia's coal resources and reserves are dominated by low and medium-quality coal (Wehnert et al., 2019).In Asian Journal of Engineering, Social and Health Volume 3, No. 8 August 2024 September 2018, Kementerian announced an increase in resources and reserves to 166 and 37 billion tons (Oktaviani, 2018).
The proportion of coal revenue has been increasing along with the coal export (Clark & Zhang, 2022).For the last four years, coal revenue collected has averaged around IDR 41.4 trillion or close to 80% of total non-oil & gas revenue.However, coal revenue contribution to the state budget is relatively low, around 1.5 to 2 % of total revenue (Energy, n.d.-a).The government's reasoning for the exploitation of coal is to increase trade revenue and help counterbalance the deficit coming from the oil and gas trade (Energy, n.d.-b).
In 2023, PT.BC conducted coal mining operational activities in Pit Z, Site Binungan.Pit Z consists of Pit Z West and Pit Z East; in Pit Z, there are several coal seams, including ZU, ZL, Z and Z_1.Based on Pit Z LOM data, it is known that the amount of coal to be mined in the range of 2023 -2029 is around 10.77 Million Tons, and the total amount of overburden (OB) to be removed is 68.49Million Bcm.In addition, based on this data, one of the coal characteristic parameters can be known, that is, HGI (Hardgrove Grindability Index); HGI is a measure of coal resistance to crushing activity; the smaller the HGI value, the harder the coal properties/characteristics to be crushed.

Figure 1. Coal Mining Business Process
The following is attached to the coal mining business process from upstream (coal mining activities in the pit) to downstream (coal barging activities by barge to the mother vessel) (Zonailo, 2023).In the business process, there is a coal crushing activity in the CPP (coal processing plant), the crushing activity aims to produce coal products with dimensions in accordance with market needs (Osborne et al., 2023).
Coal Processing Plant (CPP) in Binungan Site has 3 crushers, Location of each crusher can be seen in the figure below.

Figure 2. Coal Processing Plant (CPP) Binungan Layout
The problem occurred during the Pit Z coal crushing activity in CR 12, where during the crushing activity, it was found that the CR 12 primary crusher (single roller) was damaged with 12 missing crusher eyes (Singh & Choudhary, 2022).After further inspection and analysis, it can Asian Journal of Engineering, Social and Health Volume 3, No. 8 August 2024 be concluded that the cause of damage to the CR 12 primary crusher is the HGI value of Pit Z coal which is lower than 40, where the lowest value is 29 (seam ZL).The specification of the existing crusher unit at the Coal Processing Plant (CPP) Binungan Mine Operation is for coal with HGI values ≥ 40, so of course, with these specifications, it cannot accommodate Pit Z coal with HGI < 40.

Figure 3. Primary Crusher CR 12 (Breakdown)
The temporary alternative to solving this problem is the Pit Z coal crushing activity, which is carried out manually (using an excavator bucket) (Liu et al., 2024).However, this method is considered less effective and efficient because it can produce coal with a max size of 5 cm; a secondary crushing process is still needed (Taha, Benzaazoua, Hakkou, & Mansori, 2017).Coalcrushing activities using excavator buckets also have limitations in terms of productivity, where using this method, coal-crushing productivity is 180 TPH (12% of crusher capacity).
To respond to the existing issues related to the disrupted coal crushing process and temporary solutions that are considered less effective and efficient, improvements / best alternative solutions are needed to support Pit Z's coal crushing activity.

RESEARCH METHODS
The research methodology in this study will be carried out in several stages.The first is a preliminary analysis, which identifies the root causes of business issues and provides alternative solutions (Wright, Cairns, O'Brien, & Goodwin, 2019).The second is further analysis of the financial feasibility of the alternative solutions to determine whether the implementation of the alternatives is financially feasible.

Data Collection Method
In this research, the author will use both a qualitative and quantitative approach.The data used in this research is mainly from PT. BC Data collection is divided into two categories: primary and secondary data that support the research (Areco et al., 2021).

Data Analysis Method
In this research, the author's data from the previous process will be analyzed with predictive and prescriptive analytics to predict what will happen in the future and what must be done to achieve ideal conditions (Lepenioti, Bousdekis, Apostolou, & Mentzas, 2020).

Capital Budgeting Analysis
Capital budgeting is the process of evaluating and selecting long-term investments consistent with the firm's goal of maximizing owners' wealth (Rahmadyanti & Damayanti, 2022).The process consists of five distinct but interrelated steps: proposal generation, Review and analysis, Decision making, Implementation and Follow-up (Gitman, Juchau, & Flanagan, 2015).

Weighted Average Cost of Capital
The weighted average cost of capital (WACC), ra, reflects the expected average future cost of capital over the long run (Dobrowolski, Drozdowski, Panait, & Apostu, 2022).It is found by weighting the cost of each specific type of capital by its proportion in the firm's capital structure.

Payback Period
The payback period is when the firm recovers its initial investment in a project, as calculated from cash inflows (Gitman et al., 2015).

Net Present Value
The NPV method discounts the firm's cash flows at the firm's cost of capital.The net present value (NPV) is found by subtracting a project's initial investment (CF0) from the present value of its cash inflows (CFt) discounted at a rate equal to the firm's cost of capital (r):

Profitability Index
A variation of the NPV rule is called the profitability index (PI).For a project with an initial cash outflow followed by cash inflows, the profitability index (PI) equals the present value of cash inflows divided by the initial cash outflow (Gitman et al., 2015).

Internal Rate of Return
The internal rate of return (IRR) is the discount rate that equates the NPV of an investment opportunity with $0 (because the present value of cash inflows equals the initial investment).It is the rate of return that the firm will earn if it invests in the project and receives the given cash inflows (Gitman et al., 2015).

Operating Expenditure (OPEX)
In this research, operating expenditure is the cost for Pit Z coal crushing activity both in the ROM (run of mine) and CPP (coal processing plant).The detail of the operating expenditure of this project is shown in the table below:

Depreciation
Based on government regulation, Law Number 3 of 2020 and Government Regulation No. 77/2014 on the Implementation of Mineral and Coal Mining Business Activities, the asset owned by PKB2B's license holder will become state-owned property at the end of the mining operations.The depreciation calculation of this research is based on the assumption of the economic lifetime of infrastructure, so Pit Z Life of Mine does not adjust the calculation (Wellmer & Scholz, 2018).The Depreciation will use the straight-line method for a useful lifetime of 10 years.The depreciation is determined to be 0.83% monthly or 10% annually.

Efficiency Cost Projection
Efficiency cost projection in this research is the operation & maintenance cost difference for coal crushing activity between the Bucket Crusher and the New Crushing Station (Crushing Station 11 Upgrade).The cost projection is shown as follows:

Cash Flow Analysis
The calculation of cash flow analysis in this research does not start from the revenue stream but directly on the profit and loss stream (Cook, 2021).This is because the revenue value is obtained from the amount of coal sold.So, there is no difference in revenue value between the use of a bucket crusher and a new crushing station in coal crushing activity; the difference only occurs in the operation and maintenance cost (Purhamadani, Bagherpour, & Tudeshki, 2021).Weighted Average Cost of Capital PT.BC funds its operational activities from its own equity and does not use debt, so the calculation of WACC will be the same as the result of the Cost of Equity.The Component used for calculating the cost of equity are as follows: Calculation of Cost of Equity:  =  +  ( − ) = 6.90% + 0.362 (7.38%) = 9.57% The result for the cost of equity that is used to discount the cash flow from the project (WACC) is 9.57% Capital Budgeting Analysis (Discounted Cash Flow Method) In this research, some criteria will be used to evaluate the project's feasibility.The 5 criteria are Payback Period, Discounted Payback Period, Net Present Value (NPV), Profitability Index and Interest Rate of Return (IRR).By discounting the cash flow using WACC as a discount rate, the result of the project feasibility is shown in the table below: Based on the capital budgeting analysis, it was found that the NPV value is IDR 60.263.799.181,IRR of 61.65% which is greater than the WACC 9.57%, Payback Period 1.63 years, Discounted Payback Period 1.81 years which is shorter than Pit Z mining operations plan and lifetime use of asset and Profitability Index 2.69 which is greater than 1.

Sensitivity Analysis
In this research, sensitivity analysis is conducted to identify how significant certain variables influence the financial feasibility parameters of the project, some of the variables that used in this research are Coal Production, Equipment Rent Price, Capex, Fuel Price, WACC, Maintenance Cost and Power Price.Sensitivity analysis is carried out by increasing and decreasing the base value of each variable by ± 20%, which is then continued by looking at these changes to Asian Journal of Engineering, Social and Health Volume 3, No. 8 August 2024 the volatility of the NPV project value.The following table and chart summarize the result of the sensitivity analysis:  Based on sensitivity analysis, it is found that coal production is the most sensitive parameter that affects the increase and decrease of NPV, followed by Equipment Rent Price and CAPEX, while parameters that are not very sensitive to changes in NPV are Maintenance Cost and Power Price.

Scenario Analysis
Scenario analysis is carried out by looking at the effect of several variables simultaneously according to historical data on the volatility of the NPV value.The following table summarize the result of the scenario analysis: Asian Journal of Engineering, Social and Health Volume 3, No. 8 August 2024 Based on the results of the analysis using Monte Carlo Simulations, the NPV value obtained on average is IDR 61,007,783,556.The NPV value in Capital Budgeting Analysis (DCF Method) shows a slightly smaller value than this value, with a difference of around 1.23%.This very small difference shows that the parameter values used in this research are conservative because there is no significant difference in NPV value.
In addition, the possibility that this project is not feasible can be seen in the Prob NPV < 0 statement, where, based on the analysis results, the value is 0%.This strengthens the argument explained before in the scenario analysis that the project still generates profit even though the worst possible outcome happens.

Business Solutions
The option to invest in a New Crushing Station (CR 11 Upgrade) to support Pit Z coal production (coal crushing activity) is recommended to the company compared to existing methods & (Pit Z coal crushing with Excavator Bucket & Bucket Crusher), this is because the implementation of the project generates positive NPV, which is IDR 60,263,799,181, IRR of 61.65% which is greater than the WACC 9.57%, Payback Period 1.63 years, Discounted Payback Period 1.81 years which is shorter than Pit Z mining operations plan and lifetime use of asset and Profitability Index 2.69 which is greater than 1.
In addition, based on the Scenario analysis and Monte Carlo simulation, it was found that the project implementation does not have a chance of negative NPV; the project still generates profit even though the worst possible outcome occurs.

CONCLUSION
Based on the Capital Budgeting Analysis, the project implementation yielded several financial parameters that indicate financial feasibility, including a positive NPV of IDR 60.236 billion, a Profitability Index (PI) of 2.69, an IRR of 61.65%-higher than the cost of capital at 9.57%-and a payback period of 1.63 years with a discounted payback period of 1.81 years, both shorter than the planned operations and asset lifetime of Pit Z.The sensitivity analysis revealed that coal production is the most sensitive parameter affecting NPV, with a ±20% change in coal production leading to a ±33.69% change in NPV.Scenario analysis shows that the project remains financially feasible, with an NPV of IDR 54.581 billion in the worst-case scenario and IDR 64.498 billion in the best-case scenario.Additionally, Monte Carlo simulations estimate an average NPV of IDR 61.007 billion, a difference of approximately 1.23% from the base case NPV, with a 0% probability of NPV < 0 and a 47.28% probability of NPV > base case.

Figure 4 .
Figure 4.The research framework of the research

Table 2 . Capital Expenditure for Crushing Station 11 Upgrade
The initial investment for Crushing Station 11 Upgrade is at around IDR 35.7 Billion, based on the final quotation from the infrastructure contractor that PT has approved.BC.The detail of the capital expenditure of this project is shown in the table below: Page 1807 Asian Journal of Engineering, Social and Health Volume 3, No. 8 August 2024RESULTS AND DISCUSSIONCapital Expenditure

Table 3 . Operating Expenditure (Bucket Crusher & Crushing Station)
Note: Operation Expenditure Cost adjusted to Pit Z Coal Mining Activity Asian Journal of Engineering, Social and Health Volume 3, No. 8 August 2024