# W10_ANG_Payback Period for Student Pick-up Service

Problem Statement

Following my previous blog posting, on this posting I would discuss about Payback Period of Student Pick-up Service Business. I would simulate the payback calculation to determine the decision of funding scheme based on payback period of investment. On this posting, I put three scenarios: 1st is fully using equity fund, 2nd is using mixed equity and debt which ten million rupiah of investment (21.74%) is using debt and 3rd is also mixed which forty million rupiah of investment (86.96%) is using debt.

Feasible Alternatives

The feasible alternatives are 1st: using full equity, 2nd: mixed fund with 21.74% of investment using debt and 3rd: mixed fund with 86.96% of investment using debt.

Both simple payback period and discounted payback period are calculated below to know the sensitivity when time value of money is considered.

Outcomes/ Calculations

Scenario 1

Scenario 2

Scenario 3

Setting Minimum/ Selection Criteria

The minimum criterion is at the end of investment time horizon, the payback period of investment must be fulfilled.

Then for this case, the early payback period achieved the better.

Analysis/ Comparison of the Alternatives against the Criteria

Compare to above calculation:

For simple payback period: the earliest is scenario 1: 23 weeks

For discounted payback period: all has the same: 24 weeks

Selection of the Best/ Preferred Alternative Compared against the Criteria

Above calculation shows that the funding scheme does not impact on payback period.

So the chosen of funding scheme should not base on payback period calculation.

Performance Monitoring and Post Evaluation of Result/ Follow up Assessment

Payback period mainly only indicate a project liquidity rather than its profitability, since liquidity deals with how fast an investment can be recovered.

This can be misleading if one alternative project has a longer (less desirable) payback period than another but produces a higher rate of return on the invested capital.

That’s why recommended not to use payback period to make investment decision but as a secondary measure how quickly invested capital will be recovered.

References:

1. Sullivan, William G., Wick, Elin M., Koelling, C. Patric. (2012), Engineering Economy. 15th ed. Chapter 5: Evaluating a Single Project, page 178-225, USA: Pearson Higher Education, Inc.
2. Amos, Scott PE. (2012), Skill & Knowledge of Cost Engineering. 5th ed., USA: AACE International.
3. Humphreys, Gary C. (2002), Project Management Using Earned Value. 2nd ed., USA: Humphreys & Associates, Inc.
4. Taborda, Joana (2013). Bank Indonesia Keeps BI rate On Hold at 7.25% . [ONLINE] Available at: http://www.tradingeconomics.com/indonesia/interest-rate. [Last Accessed 24 October 2013].
5. Damodaran, Aswath (2013). Country Default Spreads and Risk Premiums. [ONLINE] Available at: http://pages.stern.nyu.edu/~%20adamodar/New_Home_Page/datafile/ctryprem.html. [Last Accessed 24 October 2013].
6. (2013). Cipaganti Citra Graha Tbk PT (CPGT.JK). [ONLINE] Available at: http://www.reuters.com/finance/stocks/financialHighlights?symbol=CPGT.JK. [Last Accessed 24 October 2013].
8. (2013). Suku Bunga PT. Bank Mandiri (Persero) Tbk. Berlaku Mulai Tanggal 19 September 2013 Deposito Rupiah. [ONLINE] Available at: http://www.bankmandiri.co.id/resource/bunga_02122011.asp. [Last Accessed 24 October 2014].
9. (2013). Indonesia Inflation Rate. [ONLINE] Available at: http://www.tradingeconomics.com/indonesia/inflation-cpi. [Last Accessed 24 October 2013].
10. Panin Bank (2013). Kredit Express. [ONLINE] Available at: http://www.panin.co.id/pages/158/kredit-express. [Last Accessed 30 October 2013].

Filed under Anggono M, Week 10

### 2 responses to “W10_ANG_Payback Period for Student Pick-up Service”

1. AWESOME Pak Anggono!! I love your case study and you did a great job on your analysis using many of the tools and techniques in Engineering Economy and Memory Jogger 2.

What I would like to see you do now is move from Engineering Economy into Humphrey’s…….. Now is a GREAT time to write a couple of blogs on using Humphrey’s especially Section 4 on using EVM.

As noted in one of my emails, one of the most important blogs I would like to see you do is a SWOT or Multi-Attribute comparison between PMI’s PMBOK Guide and Humphrey’s.

I am especially keen to see which reference or standard you would use on a project where your own money is on the line. (i.e. the Student Pick Up Service) Ideally,, what you could do is use this same case study and then compare the processes shown in Humphrey’s vs the processes shown in the latest PMBOK and see which approach makes the most sense? Which one is easier to use and understand? Which one includes case studies to help you? Which one would YOU choose as the basis to set up and manage YOUR own real life project?

Keep up the good work!!! BUT, I really need to see your PAPER!!! You have VERY exciting topic and I have provided you with not only a great template but some some very solid references to get started with.

BR,
Dr. PDG

2. Dear Dr. Paul,

Thanks a lot for the comment & 5 stars.
But, for the next two weeks I plan to submit simple Blog posting (if possible today about payback period & next week multi-attribute to choose fund composition) for giving me space to construct my paper in two weeks, but I targeted to submit my draft by end of this week.
.
I think I had direction to where my paper will lead to which I was still hanged around. I will compare Firmed Fixed Price, Fixed Price Incentive Firm and Fixed Price Award on schedule using Multi-attribute for the solution of current problem we often face that EPC Contractor bid the project too low and having problem on project performance.
To attack this problem our SCM put in SCM Guideline (PTK 007 Book Two) that for the price less than 80% OE, there shall be Change Order in the implementation for Original scope . But in implementation it does not work, because of course change order means change of scope.
I though we can solve it using FPIF, but again the ceiling price is only applicable for original scope, further more in FPIF, require proper accounting system in EPC to know the actual cost for the scope of EPC that complex, then the actual cost also may only applicable for equipment. But for Labor, it is related with EPC Productivity that should be merely responsible of EPC contractor.
I may choose FPAF on schedule, and I check this hypothesis with quantitative analysis in my paper.

I will try best to finalize my paper, Doc.
Thanks a lot for pushing me hard on paper.

Regards,
Anggono