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.
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.
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.
- 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.
- Amos, Scott PE. (2012), Skill & Knowledge of Cost Engineering. 5th ed., USA: AACE International.
- Humphreys, Gary C. (2002), Project Management Using Earned Value. 2nd ed., USA: Humphreys & Associates, Inc.
- 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].
- 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].
- (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].
- (2013). Pajak Penghasilan Orang Pribadi Untuk Keadilan. [ONLINE] Available at: http://www.pajak.go.id/content/pajak-penghasilan-orang-pribadi-untuk-keadilan. [Last Accessed 24 October 2013].
- (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].
- (2013). Indonesia Inflation Rate. [ONLINE] Available at: http://www.tradingeconomics.com/indonesia/inflation-cpi. [Last Accessed 24 October 2013].
Panin Bank (2013). Kredit Express. [ONLINE] Available at: http://www.panin.co.id/pages/158/kredit-express. [Last Accessed 30 October 2013].