INVESTMENT PROJECT ANALYSIS OF NEW PRODUCTION FACILITY AT A VACCINE MANUFACTURER

Abstract

PT BFM is one of the companies engaged in vaccine manufacturers. It has experienced a decline of sales revenue in 2016 by Rp 30.16 billion or by 1.29% from the previous year because of polio type 2 eradication initiated by the World Health Organization (WHO). Since polio vaccine export sales contribute the most to the company's net sales revenue, PT BFM must anticipate the increasingly eroded market of polio vaccine due to the global eradication program. Measles vaccine is a vaccine whose demand is forecasted to be still high because many countries in the world obligate their societies to be immunized with measles-based vaccines. The high demand for measles vaccine is utilized as a new revenue generator for the company, replacing the old revenue generator whose demand has dropped i.e. polio vaccine. However, the opportunity to maximize the sales is hindered by the limited capacity of existing measles bulk production facility. PT BFM would like to increase its capacity by investing in a new measles bulk production facility which is planned to be built either in modular-, concrete-, or steel-based construction. Thus, the main purposes of this research are to conduct an investment project analysis in order to find out the financial feasibility for each construction option, to select which construction is financially most feasible, and to determine the variables that greatly affect the investment returns.
In this study, Discounted Cash Flow (DCF) is used as a valuation method to estimate the attractiveness of investment opportunity. DCF method uses Free Cash Flow to The Firm (FCFF) projections and discounts them using a required discount rate, to arrive at present value estimates. Some decision parameters used are Payback Period (PBP), Net Present Value (NPV), and Internal Rate of Return (IRR). According to research explorations, all of the construction options are feasible to be executed, yet the most financially feasible option is concrete-based construction. It generates the NPV and IRR for Rp 258,107 million and 17.56%, respectively. While its payback period is 11.8 years. Sensitivity analysis reveals that the investment returns are highly sensitive to the changes of both sales price and Weighted Average Cost of Capital (WACC).
Keywords: Discounted Cash Flow; Financial Feasibility; Free Cash Flow to The Firm; Investment Project Analysis; New Production Facility