A Financial Feasibility Study to Determine the Best Funding Structure for a Total Renovation Project of the Karebosi Field in Makassar

Abstract

The objective of this study is to determine the best debt-equity combination to fund the Public-Private Partnership (PPP) project applying the Build-Operate-Transfer (B-O-T) scheme for the total renovation of Karebosi Field in Makassar City, Indonesia. To assess the feasibility of the project, the financial feasibility study methodology is conducted. The study covers an analysis of both external and internal analysis. The external analysis covers the analysis of macroeconomic factors and microeconomic factors utilizing the PESTEL and Porter’s Five Forces framework. The internal analysis is focused on the resources of the project. The SWOT analysis presents the outcomes of both external and internal factors. In addition, the author presents three funding structure scenarios as potential alternatives to fund the project. The funding scenarios consist of three alternatives: scenario 1 of full equity funding, scenario 2 of hybrid funding with a proportion of 50% debt and 50% equity, lastly, scenario 3 of hybrid funding with a proportion of 70% debt and 30% equity. Along with that, the author also considers the operational occupancy scenarios that include worst-case, base-case, and best-case scenarios. The percentages of each of the three scenarios are 40%, 60%, and 80%. Following that, the financial projections are calculated for each scenario, resulting in investment measurements such as Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Period. Finally, a risk analysis is performed to assess the sensitivity of the best funding structure and to identify potential risks. Additionally, the evaluation of risk mitigation is added to enhance the overall effectiveness of the best funding structure. The findings indicate that the project is feasible, and scenario 3 of hybrid funding with the combination of 70% debt and 30% equity is the best funding structure for the project. In addition, the author performs a sensitivity analysis on the best funding scenario, considering ten input variables. Furthermore, the sensitivity analysis indicates that five variables, namely WACC, assumption of operational occupancy per day, interest rate, soccer field rental rate, and the ratio of operating expenses to revenue, significantly impact the net present value (NPV). Strategies to reduce potential risks are effective marketing and operations, managing occupancy rate volatility using backup strategies, developing new revenue streams, and negotiating long-term rate fixes with lenders. Therefore, future research can explore the dynamic nature of the external factors that influence the Internal Rate of Return (IRR), Net Present Value (NPV), Payback Period, and Weighted Average Cost of Capital (WACC). Determining the best funding may require ongoing research to assess the effects of market conditions, interest rate fluctuations, and industry-specific factors. Furthermore, explore how input variables like WACC, operational occupancy per day, interest rate, soccer field rental rate, and operating expense ratio to revenue affect NPV.