p-ISSN 2980-4868 | e-ISSN
2980-4841
https://ajesh.ph/index.php/gp
Solvent Machine Investment for Increasing Digital
Printing Profit
Andriana Yudistira1*,
Taufik Faturohman2
1,2Institute Teknologi Bandung, Bandung, West Java, Indonesia
Emails:
yudhistira.andriana@gmail.com1*, taufik.f@sbm-itb.ac.id2
ABSTRACT:
This study evaluates the financial viability of
investing in solvent printing machine units for producing two products—flexible
material and sticker material—targeted at the MSME sector. The research uses
capital budgeting techniques to determine project profitability, focusing on
net present value (NPV), internal rate of return (IRR), payback period (PP),
and profitability index (PI). The analysis finds that the project is
financially viable, with an initial investment of IDR 281 million yielding an
NPV of IDR 288.4 million and an IRR of 69.84%. The investment is projected to
be recouped in under two years, with a profitability index of 5.13. Based on
these findings, the research recommends increasing marketing efforts for
flexible materials, supporting community initiatives, and offering free design
services as strategies to enhance profitability and community engagement. These
recommendations align with the financial analysis, suggesting ways to maximize
returns and build customer loyalty.
Keywords: Digital Printing, Capital Budgeting Techniques, Investment,
MSMEs.
INTRODUCTION
MSMEs play a
crucial role in the Indonesian economy, contributing over 61% of the country's
GDP annually and absorbing 97% of the workforce
The digital
printing industry is gaining popularity for company promotion and is expected
to grow at a 5% rate. This growth can influence the demand for promotional
media such as banners, brochures, and flag promotions in printing businesses
The printing
industry, especially solvent products, is a product that is always needed for
product promotion, business, and organizational and community activities
(Source: Company
sales report 2023 – 2024)
Figure 1. Revenue
from sales of solvent products
This study aims to analyze investment, price,
benefit value, and risk in order to provide investment
recommendations for adding solvent machine units for the development of the
printing business
This study
uses quantitative methods to answer the research questions and research objectives
as follows:
1. Is the investment in solvent machines
profitable, according to the parameters used in capital budgeting techniques?
2. What are the sensitive variables that can
affect the NPV?
3. What are the best and worst-case scenarios for
the project?
4. What is the probability of a positive NPV
using Monte Carlo simulation?
The research
objective of this study is to assess the financial feasibility of the project
using capital budgeting techniques, including:
1. Analyzing investment by calculating the NPV
value, internal rate of return (IRR), payback period, and probability index can
be accepted and profitable.
2. Evaluating which variables are sensitive to
NPV when there is a positive and negative change in variables of 20%.
3. Analyzing and calculating the best and worst
scenarios of changes in variables that affect NPV.
4. Calculating and analyzing values that affect
positive NPV with Monte Carlo simulation
Statistical
analysis allows researchers to identify patterns, trends, and relationships
between different variables." in the book by Hen, Manion, & Morrison
In managing
the business issue presented in the introduction, to analyze results by
processing financial variables, several financial analyses are needed, as
follows:
General Assumptions
The basic
general assumptions developed to support the analysis of the project is
detailed below:
Table
1. General Assumption and Indonesia Inflation Rate
|
Value |
Remarks |
|
|
Number of days in years |
365 |
|
|
Number of months in a year |
12 |
|
|
Inflation rate |
2.95 % |
inflation rate in Indonesia from 2018 to 2024 |
(Source:
Author’s Analysis, 2023)
The sales projections
assume a monthly indoor and outdoor product sales price of IDR 20,000 per meter
based on market and competitor surveys. The banner production projection uses
an average total print per month of 13.387 m2 per year, based on the Indonesian
printing sector growth.
Operating
expenses include employee salaries, wages, office supplies, and capital
expenditures, excluding goods sold and significant assets
Table 2. Assumption for Operating Expenses
|
Value |
||
|
Building Rental Cost |
25,000,000 |
per year |
|
Number of Worker |
5 |
Persons |
|
Wage/Salary |
2,500,000 |
IDR |
|
G&A Expenses |
16.9% |
of Total Sales |
|
Marketing |
1.0% |
|
(Source: Author’s Analysis, 2023)
Capital
expenditures, including solvent printing machines, are the total cost of
establishing a business or investing, including work preparation, mobilization,
and electrical installation equipment, adjusted for inflation
Table 3. CAPEX of Solvent Printer Purchase
|
Qty |
Unit |
Unit Price |
Total |
Remark |
|
|
Mobilization and de-mobilization |
1 |
ls |
2,500,000 |
2,500,000 |
|
|
Additional electrical power |
1 |
ls |
5,600,000 |
5,600,000 |
Power Upgrade from 5,500 V to 7,500 |
|
Electrical Installation Equipment |
1 |
ls |
1,500,000 |
1,500,000 |
Installation of electrical cables and slots |
|
Rent lifting equipment |
1 |
ls |
2,200,000 |
2,200,000 |
Rent a crane truck to unload the engine from the truck |
|
machine operator's computer |
1 |
unit |
7,500,000 |
7,500,000 |
|
|
designer's computer |
1 |
unit |
10,500,000 |
10,500,000 |
|
|
Stabilizer |
1 |
unit |
5,800,000 |
5,800,000 |
|
|
Pressing, glue and sew machine |
1 |
unit |
2,100,000 |
2,100,000 |
|
|
Solvent Printer Purchase |
1 |
unit |
230,000,000 |
230,000,000 |
D1300-2 (four head Epson I 6200) |
|
Total |
267,700,000 |
|
|||
|
Grand Total with contigencies 5% |
281,085,000 |
|
|||
(Source:
Author’s Analysis, 2023)
The Solvent printer machine's residual value
is projected to depreciate at 1.7% per month, reflecting the investment in the project's
fixed assets.
Income
Statement Projection
The Income
Statement Projection estimates revenues and costs based on sales volume
changes, often considering multiple main variables:
The business
operations are projected to generate revenue from digital printing, including
apparel, sublime, and solvent machines, with a growth rate of 2.81%, based on a
quantitative projection of 16,245 m2 and solvent machines projection for the
next five years:
Figure 2. Solvent’s Machine Production
(Source: Author’s Analysis, 2023-2024)
The company calculates revenue for solvent
machine production using average sales prices per square meter, ranging from
IDR 20,000 for flexi to IDR 65,000 for stickers, which increases with inflation
each year; the formula below:
Total Revenue=Total
Volume Production x price
The table presents the revenue calculation
results for the company's ten years of operation:
Table 4. Revenue Projection
|
Year |
Flexi |
Sticker |
Total |
|
1 |
302,966,298 |
21,937,129 |
324,903,428 |
|
2 |
247,671,170 |
19,281,765 |
266,952,935 |
|
3 |
266,789,444 |
19,804,112 |
286,593,555 |
|
4 |
279,618,255 |
20,284,674 |
299,902,929 |
|
5 |
292,912,575 |
20,776,897 |
313,689,472 |
(Source:
Author’s Analysis)
Operating profit
margin indicates the "pure benefit" received for every rupiah earned,
as it only accounts for operating profits and excludes interest, taxes, and
dividends on preferred stock.
As shown in the
table above, the net profit margin calculated from the initial year of business
operations increases to a 34% to 41% annual margin over a five-year period. The
average net profit margin over a five-year period is 39%.
Figure 3. Solvent’s Machine Production
(Source:
Author’s Analysis)
The projection of operating expenses for
general, administrative, and salary expenses, with a baseline of 16.9% of the
COGS value, reveals building rent cost as the largest contributor at 44%, above
are as follows in the graph below:
Figure 4. Operating Expenses and Depreciation
Projection
(Source:
Author’s Analysis)
After calculating net profit, the author also use the formula below to calculate the net profit margin of
the business:
The net
profit margin from the initial year of business operations increases from 34%
to 41% annually over a five-year period, with an average of 39%; using that
formula, the author’s calculation for operating profits is shown in the table
below:
Table 5. Net
Profit Margin
|
Year |
Revenue |
Tax
Expenses |
Net
Profit |
Net
Profit Margin |
|
0 |
340,906,496 |
22,112,273 |
66,336,820 |
19% |
|
1 |
368,268,910 |
17,946,476 |
53,839,428 |
15% |
|
2 |
389,283,731 |
19,645,917 |
58,937,750 |
15% |
|
3 |
410,036,195 |
21,274,128 |
63,822,384 |
16% |
|
4 |
431,610,391 |
22,935,023 |
68,805,070 |
16% |
|
5 |
456,188,484 |
25,093,645 |
75,280,934 |
17% |
(Source: Author’s
Analysis)
Cost of Capital (Cost of Equity) Calculation
Solvent
printing machines are funded through owner's equity, with no long-term debt
used in projections
Table 6. Assumption
and Weight for Cost of Capital
|
Variable |
Value |
Source |
|
Risk free rate |
6.99% |
IBPA 10 Years Government Bond Yield |
|
Risk Premium |
6.58% |
Damodoran |
|
Cost of Debt |
0% |
company |
|
Cost of Equity |
100% |
company |
(Source: Author
and Internet Research)
Therefore, in this calculation, the weighted
average cost of capital (WACC) is represented as the cost of equity; the cost
of equity (based on
Where:
|
rs = cost of equity |
Rm =
market rate of return |
β = beta |
|
Rf =
risk free rate |
Rm – Rf
= risk Premium |
|
The cost of
equity is calculated using a bottom-up approach, which is shown in the table
below:
Table 7. Cost of
Equity Calculation
|
Variable |
Weight |
|
RF = Risk Free Rate |
6.85% |
|
ERP (Equity Risk Premium) |
7.62% |
|
β = Beta of the security |
1.37 |
|
monthly market return |
0.36% |
|
rm = Market Rate of Return |
4.43% |
|
Cost of Equity, We |
17.29% |
|
WACC = 100% Cost of Equity |
17.29% |
(Source: Author’s
Analysis)
Financial Analysis
The author
uses an operating cash flow (OCF) projection to calculate the cash flow of all
investments, as the owner's equity fully finances them. The results of the
operating cash flow (OCF) calculation are shown in the table below:
Table 8. Cash
Flow Projection
|
Year |
EBIT |
Tax of EBIT |
NOPAT |
Depreciation |
OCF |
|
0 |
88,449,093 |
22,112,273 |
66,336,820 |
- |
66,336,820 |
|
1 |
71,785,904 |
17,946,476 |
53,839,428 |
29,540,000 |
83,379,428 |
|
2 |
78,583,666 |
19,645,917 |
58,937,750 |
29,540,000 |
88,477,750 |
|
3 |
85,096,512 |
21,274,128 |
63,822,384 |
29,540,000 |
93,362,384 |
|
4 |
91,740,093 |
22,935,023 |
68,805,070 |
29,540,000 |
98,345,070 |
|
5 |
100,374,578 |
25,093,645 |
75,280,934 |
29,540,000 |
104,820,934 |
(Source: Author’s
Analysis)
Profitability
analysis uses four parameters: net present value (NPV), internal rate of return
(IRR), payback period (PP), and profitability index (PI) to assess business
profitability. Each parameter has different criteria and produces certain
results after calculation, as illustrated in the table below:
Table 9. Capital
Budgeting Analysis
|
Parameter |
Criteria |
Value |
Decision |
|
Net
Present Value (NPV) |
>0 |
288,404,195 |
Accepted |
|
Internal
Rate of Return (IRR) |
>Cost
of Capital |
69.84% |
Accepted |
|
Payback
Period (PP) |
<3
Years |
1.552 |
Accepted |
|
Profitability
Index (PI) |
>1 |
5.134 |
Accepted |
(Source: Author’s
Analysis)
Sensitivity Analysis
The
sensitivity analysis of this project is displayed in the tornado chart, serving
as a guide for making adjustments to assess the risks
associated with different variables
Based on the
tornado diagram given, the variables that have the greatest impact on the
change in NPV are the price of product A (Flexi) and the Volume of sales of
product A (Flexi)
Table 10. Sensitivity
Analysis
|
Current Assumption |
+20% SWING |
-20% SWING |
+20% SWING NPV |
-20% SWING NPV |
|
|
Investment |
281,085,000 |
(337,302,000) |
(224,868,000) |
-19.5% |
3.9% |
|
Inflation Rate |
2.95% |
3.54% |
2.83% |
3.7% |
0.1% |
|
Salary Expenses |
12,500,000 |
15,000,000 |
12,000,000 |
-2.9% |
0.6% |
|
G & A Expense |
54,908,184 |
65,889,821 |
52,711,856 |
-2.9% |
0.6% |
|
Quantity Sold A |
15,889 |
19,067 |
12,711 |
-22.9% |
22.9% |
|
Quantity Sold B |
356 |
427 |
285 |
-0.8% |
0.8% |
|
Price A |
20,000 |
24,000 |
19,200 |
63.2% |
-12.0% |
|
Price B |
65,000 |
78,000 |
62,400 |
4.6% |
-0.9% |
|
NPV |
288,404,195.4 |
(28,122,303.8) |
481,098,237.2 |
|
|
(Source: Author’s
Analysis)
Figure 5. Revenue,
Operating Profit, and Net
Profit Comparison
(Source: Author’s
Analysis)
Scenario Analysis
The authors conducted a
scenario analysis using 20% most responsive variables from sensitivity analysis to determine
the optimal, most favorable, and least favorable outcomes of various
potential events
Table 11. Scenario Analysis
|
Variable |
Worst Case |
Base Case |
Best Case |
Monte Carlo
Simulation |
|
Investment |
(337,302,000) |
(281,085,000) |
(224,868,000) |
(673,078,414) |
|
Revenue |
72,725,197 |
40,906,496 |
409,087,795 |
296,969,633 |
|
Inflation Rate |
5.95% |
2.95% |
1.32% |
5.61% |
|
Salary Expenses |
12,444,003 |
12,500,000 |
12,752,411 |
12,598,590 |
|
G & A Expense |
54,662,208 |
54,908,184 |
56,016,940 |
55,051,148 |
|
Quantity Sold A |
11,917 |
15,889 |
18,273 |
14,811 |
|
Quantity Sold B |
285 |
356 |
427 |
341 |
|
Price A |
15,000 |
20,000 |
23,000 |
20,950 |
|
Price B |
52,000 |
65,000 |
78,000 |
74,859 |
|
NPV |
(28,122,303.77) |
329,411,031 |
481,098,237.16 |
|
|
Range |
509,220,541 |
|
||
Table 11 shows that
the most unfavorable outcome results in a negative net present value (NPV) of IDR (28,122.303.8), while the most favorable
outcome yields a NPV of IDR 481,098.237.2, more than twice the
base scenario's projected value.
The Monte Carlo simulation
method is used to analyze
investment decisions and assess risks,
ensuring the right decisions under uncertainty
Table 12. Monte Carlo Simulation Result
|
Descritive Statistic |
|
|
Min: |
(885,174,718.82) |
|
Max: |
1,220,435,653.40 |
|
Mean: |
243,262,054.13 |
|
Standard Deviation: |
295,441,772.78 |
|
Median: |
255,419,624.23 |
|
Kurtosis: |
0.18 |
|
Skewness: |
0.01 |
|
Prob NPV<0: |
18.9% |
(Source: based on author calculation-summary
of Monte Carlo simulation)
Figure 6. Monte
Carlo Simulation
(Source: based on
author calculation- NPV distribution profile)
The mean of
NPV across simulation is IDR 260,023,181.24 with a minimum value of negative
IDR 885,144,718.82 and a maximum value of IDR 1,225,435,653.40, or it can be
explained that the average NPV is IDR 260,023,181.24 this is the added value
that this project can provide to PT. Yudhis Digiprint, where the company’s revenue will increase
through an efficiency cost amount of IDR 260,023,181.24 in present value
Judging from the distribution, this value falls within the standard deviation
range. The best possibility is that this project will generate revenue of IDR
1,225,435,653.40, and the worst possibility is if all variables do not meet
expectations. This project will still generate revenue of IDR 885,144,718.82,
which is negative for PT. Yudhis Digiprint.
The probability of failing this project (NPV<0) is 18.9%
PT Yudhis Digiprint is a digital
printing company that offers a range of advertising solutions, including
merchandise and clothing for promotional or event purposes. The company
utilizes advanced technology, sophisticated machines, and accounting software,
offering free custom design services and unlimited revisions to ensure customer
satisfaction. With the increasing number of micro, small, and medium
enterprises (MSMEs) in West Java and the popularity of ordering through
marketplaces and smartphones, the digital printing industry has increasing
profit potential. The company requires a capital expenditure of IDR 281 million
for solvent machines for flexi and stickers, funded through owner equity. The
business generates revenue from sublimation machine production, clothing, and
solvent products. A feasibility study is currently underway to procure machines
for solvent product production. The solvent machine production's net present
value (NPV) is IDR 288,404,195, with an internal rate of return of 69,84%. The
business has the potential to return its initial investment within one year and
eight months of operation.
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Andriana Yudistira, Taufik
Faturohman(2024) |
|
First publication right: Asian Journal of Engineering, Social and Health
(AJESH) |
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