Abstract
For a large firm like PT LG Electronics Indonesia (LGEIN), which has resulted in high manufacturing utilization, require a few percent reductions in component prices every year. The one of potential project for cost reduction is tooling investment. After Livia is produced and the expenditure of new tooling is made, it is continually faced with the problem that current method computing profits are conventional without considering the expenditure of tooling in the long run. Finally, a firm’s capital budgeting decisions is needed because it defines its strategic direction. Four primary methods in the capital budget to decide whether or not the project should be accepted are: discounted payback, net present value, internal rate of return and profitability index. In addition, we use sensitivity analysis to indicate which factor has significant interfere with the project. The results generated that discounted payback is just 2 year 6 months less life of the project for 3 years, NPV generated positive result $3,502,387, and an IRR of this project is 25% greater than required rate of return 10% and profitability index gets 1.8 greater than 1. In sensitivity analysis shows that the project’s NPV is very sensitive to changes in sales and COGS, and relatively insensitive to changes in either growth rate or rate of return.In a method of capital budgeting analysis, Livia project could be accepted with initial investment for $4,199,288 and still more detailed analysis is required to support the expenditure.
Highlights
The global company especially LG Electronics Indonesia (LGEIN) has grown substantially in the last few years that have resulted in high manufacturing utilization.Inflation in the customer price indices has remained below the historical average.Perhaps this contradictory behavior is due to attempts of original equipment manufacturers to contain or even reduce product cost
Four primary methods are used to rank projects and to decide whether or not they should be accepted for inclusion in the capital budget: (1) discounted payback, (2) net present value (NPV), (3) internal rate of return (IRR), and (4) profitability index (PI)
We will calculate the year 2007 to 2011 financial ratios for LGEIN, using data from balance sheets and income statements given in Table 3 and 4.4 we will evaluate the ratios in relation to the industry averages that obtained from the risk management association for Electronic industry electrical equipment and household appliances
Summary
The global company especially LG Electronics Indonesia (LGEIN) has grown substantially in the last few years that have resulted in high manufacturing utilization. Four primary methods are used to rank projects and to decide whether or not they should be accepted for inclusion in the capital budget: (1) discounted payback, (2) net present value (NPV), (3) internal rate of return (IRR), and (4) profitability index (PI). Find the present value of each period’s net cash flow, including both inflows and outflows, discounted at the project’s cost of capital. The most important, and the most difficult, step in capital budgeting is estimating project’s cash flows-the investment outlays and the annual net cash inflows after a project goes into operation. The finance profession has had difficulty in developing a practical approach to measure the investor’s required rates of return; financial managers often used a method called the capital asset pricing model (CAPM). We prefer the latter approach and choose the following four questions as a map in using financial ratios: 1. How liquid is the firm?
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