Problem
A new investment in a company is still being considered by applying for a long-term debt of IDR 10 billion with an interest rate of 7% per annum (pa). The main expenditure of this investment is on equipment with a value of Rp9 billion and has the same economic life as the investment period of 8 years. The residual value of this equipment is estimated at Rp800 million and the selling price at the end of the investment period is Rp850 million. This equipment uses the straight line method of depreciation. The company invests working capital at the beginning of operations of Rp1 billion which is assumed to be recovered 100% every year during the investment period and if there is an excess at the end of the investment, this working capital can be sold. With this new investment, it is estimated that sales will increase by Rp. 2.8 billion, which grows by 2% annually with additional operating expenses of Rp. 1.2 billion, which grows by 1.5% annually. It is known that the corporate income tax rate is 10% and the tax on asset sales is 15%.
Task
a) Based on the data above, calculate 2 project feasibility indicators based on the concept of time value of money (TVM) with an opportunity cost of 8% pa, and 1 indicator without TVM. From these indicators, is this investment worth making?
b) Explain what funding strategy do you think is best to recommend to the Board of Directors in realizing the investment.