PT Krakatau Steel has a steel-making machine. To increase its production capacity, PT Krakatau Steel plans to buy a new machine at a price of IDR 10 billion and an installation cost of IDR 500 million. This machine has a lifespan of 5 years, with a 10% residual value. The company hopes to sell the machine for Rp. 500 million when its economic life is over. It is projected that this new machine will increase sales levels to IDR 3 billion per year. The operational costs that must be borne by the company are variable costs of 40% of sales and a fixed fee of IDR 300 million (including a depreciation fee of IDR 100 million). The current tax rate is 20% and the desired rate of return is 25% per annum.

a) Analyze whether PT Krakatau Steel's plan to purchase this machine is feasible. Use the Discounted Payback Period and Net Present Value methods.

b) Explain the importance of capital budgeting analysis in the company.

Answer rating: 100% (QA)

Solution a Feasibility Analysis 1 Discounted Payback Period DPBP The Discounted Payback Period is the time taken by the project to recover its initial investment considering the time value of money Th... View the full answer