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Evaluation of Expansion Funding by the PTPN 12 Indonesia
Field Study Abstract:
Coffee makes a large economic contribution to the economy of Indonesia. In 1999, Indonesia was the fourth largest coffee producer country in the world after Colombia, Brazil, and Mexico. Coffee is one of Indonesia’s most competitive export commodities because of input factors, demand factors, industry level, and government support. The government, through its companies, continuously encourages this subsector to develop.
PTPN 12 started coffee powder production in 1996. In the first year, production was sold only to their employees. In the following year, increased production enabled sales within a limited region near the firm. Finally in 1998, coffee powder sales reached the Besuki residence area. In this region, the demands of the coffee powder had always increased because PTPN 12 sets the price more cheaply compared with the other brands of coffee powder.
Based on the current condition of coffee powder sales, PTPN 12 had plans to expand its coffee powder production and expand its market to the other areas near Besuki. For this, PTPN 12 needed additional fund of around IDR1B (USD125,000). The question was: “Where can PTPN 12 get the funds to support the estate’s plan to expand its coffee powder production?”
There were four alternative funding sources for the PTPN 12 to support its expansion planning: (1) external financing, (2) internal funding, (3) combination of external financing and internal funding of equal proportion (50%:50%), and (4) combination of external financing and internal funding of unequal proportion (75%:25%). Interest rate of external financing was 20 percent per year and term of debt was 10 years.
Under financial analysis, these ratios were calculated: current ratio, time interest earned, debt to equity ratio, return on investment, return on equity, profit margin, and net worth to debt ratio.
Considering the economic crisis in Indonesia, which may last up to at least 2000, the choice of funding should be based on a relatively lower risk and comparatively higher returns. This was a choice between ROI and CR, or both. The ROI indicated the growth prospects of the firm and its ability to attract more capital, in the long term. In the short term, CR was an indication that the company can convert, if necessary, current assets into cash in a timely and orderly fashion. For both long- and short-term considerations, the best choice was a combination of ROI and CR; this means that the best source of funding was 100 percent external.
The other indicators to determine the source of expansion funding were Net Present Value (NPV) and Internal Rate of Return (IRR) based on projected cash flow after expansion of funding. Based on the computation of NPV under an interest rate 20 percent, the result of NPV was IDR1.5M with a positive sign, which means that the expansion funding totally from the bank loan has a favorable effect in the future. The result of IRR was 40.09 percent, which means that the expansion funding with alternative 1 will yield returns higher that the interest rate of the bank loan.
Composition of the loans coming from the banks was: IDR100M short-term loan to add to company working capital and IDR900M long-term loan to purchase new equipment for expansion in their production capacity.