FEASIBILITY STUDY FOR FOOTWEAR PRODUCT DEVELOPMENT … · 2019. 9. 5. · Abstract: Footwear industry continues to grow in line with increasing demand. One of well-known local brand

Journal of Humanities, Language, Culture and Business (HLCB)

Vol. 3: No. 13 (September 2019) page 36-50 | www.icohlcb.com | eISSN: 01268147

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FEASIBILITY STUDY FOR FOOTWEAR PRODUCT

DEVELOPMENT

(CASE STUDY IN XYZ GROUP)

Fikia Doe’ana Maudy, Raden Aswin Rahadi

School of Business and Management

Institut Teknologi Bandung

Jalan Ganesha No. 10, Bandung 40132, West Java

*Corresponding e-mail address: [email protected]

Abstract: Footwear industry continues to grow in line with increasing demand. One of

well-known local brand in Cibaduyut is Catenzo which is owned by XYZ Group. To

increase competitiveness, company needs to develop new shoe products. The objective of

this study is to analyze the footwear industry, find out business strategies of the company,

and conduct a financial feasibility analysis. Feasibility study is determined based on the

value of the ratio between the income investors gained at the cost of new project. The

value of feasibility study based on the analysis of the Net Present Value (NPV), Internal

Rate of Return (IRR), and Pay Back Period (PBP). Sensitivity Analysis is performed to

analyze the variables that most influence on NPV calculations. Financially value NPV >

1, value of the IRR 45.47%, and the value of PBP is for 6.19 years. Based on the

calculation, it can be conclude that this project is financially feasible because the results

show that all indicators are acceptable. Based on the Sensitivity Analysis is found that

there are five variables that most influence the value of NPV, there are inflation rate,

quantity sold realization, price per unit realization, direct material, and long-term debt

interest rate.

Keywords: Feasibility Study, Footwear Industry, Product Development, Sensitivity

Analysis.

2019 JHLCB

Introduction

The growth of the creative industry in the world is growing very rapidly from year

to year. The growth of creative industries in Indonesia is also in line with the growth of

the creative industries in the world. There are around 8,203,826 creative economic

business units spread throughout Indonesia. The data also shows an increase in the

contribution of the Creative Economy to the National Economy from 2010-2016 which

was 9.82% per year. The data and phenomena prove that the growth of the creative

industry in Indonesia has the potential to develop in the future (BEKRAF, 2017). With

the increasing number of creative industries, competition in this industry has also

increased, so the company must always know the current market needs and in the future.

One of the industries affected by the development of the world economy is the

footwear industry sector. Indonesia is the 4th largest shoe consumer country with

consumption of 886 million pairs of footwear (Zuraya, 2019). The domestic footwear

mailto:[email protected]



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industry continues to grow along with the increase in world demand. The Director

General of IKM (Industri Kecil Menengah) of the Ministry of Industry said that the

footwear industry, leather products, and clothing is a strategic sector and a priority to

continue to be developed because it is able to contribute significantly to the national

economy. The market share in the international market reached 4.4%. This makes the

footwear industry in Indonesia has a large market opportunity both domestically and

abroad. In RIPIN (Rancangan Induk Pembangunan Industri Nasional) and strategic plan

of 2015-2019, the footwear industry is one of the ten mainstay industries and priorities to

be developed by the Ministry of Industry (Aprisindo, 2017). To support this, the

Indonesian government has set the footwear industry as one of the industrial sectors that

will continue to be developed because of its enormous potential.

The area that known as the center for footwear production in Indonesia is

Cibaduyut. The shoe industry in Cibaduyut is currently growing rapidly, therefore

increasing the standardization of quality of products is important for Cibaduyut shoe

industry players. One of the well-known shoe brands in the Cibaduyut area is Catenzo. In running the shoe industry, XYZ Group facing the problems there are weak

competitiveness, decreasing the amount of shoe production capacity, reducing in number

of craftsmen, declining image of products made by Cibaduyut. It can be seen in figure 1,

the profit achievment of company during operations from 2008 to 2018. It appears that

from 2008 to 2014 the company continued to increase; this was due to the large demand

for shoes for this company. But the decline in profits experienced by companies in 2015

and 2018. In 2015 the company experienced a decline in profits by 38% also there was a

decline in profits again in 2018 by 53%, this was due to reduced demand which caused

the number of sales to decrease.

Figure 1. Profit Achievement of XYZ Group during 2008-2018 (Source: Company’s Data)

Competition in the fashion industry, especially shoes, is getting tougher due to the

large number of imported shoe products entering the market. This caused the Cibaduyut

shoe business to suffer losses because it was unable to compete with imported products.

As well as increasing the number of new local brands that are starting to emerge are also

a threat to the company.

But seeing the growth of the footwear industry, there is a huge potential that can

be utilized by the company. So that companies can remain competitive in this industry,

companies need to try to expand their business in the leather shoes product segment in

the premium market because as we can see data from BPS in figure 2, the growth of the

Industry has increased in 2018.

0

1E+09

2E+09

3E+09

4E+09

5E+09

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

XYZ Group Profit Achievement



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Figure 2. The Growth of Leather, Goods from Leather, and Footwear Industry in 2014-2018

(Source: BPS, 2018)

The strategy that will be carried out is related to conducting differentiation

products in order to increase competitiveness. To see the feasibility of developing this

business, the analytical method used is a feasibility study. This project was carried out so

that the company could expand its market so that it would benefit by taking the

opportunity.

Literature Review

Analysis of Business Situation

For analyzing business situation or external analysis, there are two techniques that

are used: PESTEL analysis and Porter's Five Forces analysis. The reason is because

according to Thompson's theory is explaining about macro-environment about the

industry can be seen in figure 3. This research use PESTEL analysis and for knowing

about the competitive environment about the industry, is using Porte’s Five Forces

analysis (Thompson, 2016). An external environmental analysis will identify which can

provide insight into future problems or opportunities for new success. Using PESTEL and

the Porter’s five forces techniques together can help provide a detailed picture of the

situation facing the organization (Porter, 2004).

Figure 3. Macro-Environment Situation

(Source: Thomson, 2016)

1. PESTEL analysis can be used to assess the strategic relevance of the six principal

components of the macro-environment:

a. Political: These all include factors regarding government policy, including

how and to what extent government interference in the economy. Among them

are political stability, foreign trade policy, tax policy, fiscal policy, political

climate, and so on. It is clear from the list that political factors often affect

organizations and how they do business (Thompson, 2016).

b. Economic: Through analysis on these economic factors, the company or

organization will be reviewed by economic problems that have an impact on



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the company and the course of the business. These economic conditions

include the general economic climate and specific factors such as interest

rates, exchange rates, inflation rates, unemployment rates, economic growth

rates, and so on (Thompson, 2016).

c. Social: This social factor analysis will analyze the market socio-economic

environment and all factors that can affect the needs of customers in the

demand for certain goods and services through elements such as customer

demographics, age distribution, socio-cultural, attitudes and lifestyles, and

educational backgrounds. With this analysis, it will understand about

consumer needs (Thompson, 2016).

d. Technology: This factor analyzes and evaluates how technology can be

positive or negative towards the introduction of products or services to the

market. Technological factors that support all things that can help in facing

business challenges and support the improvement of the company's business

processes (Thompson, 2016).

e. Environmental: Environmental factors can be used when conducting strategic

planning or trying to influence buyer decisions such as geographical location

factors. In addition, there are also environmental factors such as weather,

climate, climate change, and related factors. This factor analysis is carried out

to see the impact felt by the company (Thompson, 2016).

f. Legal: Analysis of legal factors includes legal influences such as changes in

existing or future laws (Thompson, 2016).

2. Porter’s Five Forces Analysis is use to determine the nature and strength of

competitive pressures in a given industry.

a. The threat of new entrants: Competitive pressure comes from the threat of the

entry of new entrants who have the potential to become competitors. Threat of

entry rather than actual entry may be sufficient to ensure that established firms

constrain their prices to the competitive level. This strength analysis

determines how easy or difficult it is to enter certain industries (Grant, 2010).

b. The bargaining power of buyers: The strength of buying power that firms face

from their customers depends on two sets of factors: buyers’ price sensitivity

and relative bargaining power such as buyer’s information and ability to

integrate vertically (Grant, 2010).

c. The bargaining power of suppliers: Analysis of the determinants of relative

power between the producers in an industry and their suppliers is precisely

analogous to analysis of the relationship between producers and their buyers.

The key issues are the ease with which the firms in the industry can switch

between different input suppliers and the relative bargaining power of each

party. (Grant, 2010).

d. The threats of substitute product and service: Analysis of these substitutes will

analyze the substitute or substitute of the products produced by the company.

Substitute goods are at least two products that could be used for the same

purpose by the same consumers. If the price of one of the products rises or

falls, then demand for the substitute goods or substitute good (if there is just

one other) is likely to increase or decline. The other products – the substitutes

– have a positive cross-elasticity of demand. These obstacles or threats occur

when buyers or consumers get other products that have same function (Grant,

2010).

e. Rivalry among Competitors: For most industries, the major determinant of the

overall state of competition and the general level of profitability is competition



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among the firms within the industry. In some industries, firms compete

aggressively—sometimes to the extent that prices are pushed below the level

of costs and industry-wide losses are incurred. In other industries, price

competition is muted and rivalry focuses on advertising, innovation, and other

nonprice dimensions. Analysis of the strength of competition is done to see

how high the level of competitive power among competitors in the industry

and the same target market (Grant, 2010).

Financial Projection

Financial aspects that need to be adressed, among others, include the estimated

cost of investment (Capex), operating and maintainance costs (Opex), working capital

requirements, and sources of financing and revenue forecasts. Based on the calculation of

the financial variables above, the calculation and analysis of the feasibility indicators of

investment/business done.

1. Net Working Capital

Net working capital is defined as the difference between the firm’s current assets

and its current liabilities. When current assets exceed current liabilities, the firm

has positive net working capital. When current assets are less than current

liabilities, the firm has negative net working capital. The objective of working

capital management is to manage each of the firm’s current assets and current

liabilities to achieve a balance between profitability and risk that conributes

positively to the firm’s value (Gitman, 2015).

2. Discounted Cash Flow (DCF)

In calculating Discounted Cash Flow, the theory that can used is a concept called

Free Cash Flow (FCF). FCF shows the amount of cash flow available to investors

after the firm has met all operating needs and paid for investments in net fixed

assets and net current assets (Gitman, 2015).

FCF is divided into two, that are Free Cash Flow to the Firm (FCFF) and Free

Cash Flow to Equity (FCFE). FCFF is the amount of cash flow period for

distribution to all claim holders in the company including shareholders,

bondholders, and preferred shareholders, meanwhile FCFE is the remaining cash

flows after the company fulfills its financial obligations including debt repayment

and reinvestment (Damodaran, 2015).

3. Capital Structure

In funding an investment project, there will be a combination of firm equity and

debt, is called capital structure. Cost of capital reflects the expected average future

cost of funds over the long run and it reflects the entirety of the firm’s activities

(Gitman, 2015). Calculation the cost of capital involves debt and equity.

Therefore, the calculation of the cost of capital of the company is done using the

cost of debt and cost of equity. In companies that have debt and equity, the method

used is the weighted cost of capital (WACC) (Binus, 2015).

a. Cost of Long-term Debt

The cost of long-term debt is the financing cost associated with new funds

raised through long-term borrowing (Gitman, 2015). The cost of long-term

debt of company is generally worth the interest rate on loans which can derive

from banks or non-bank institutions.



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b. Cost of Equity

The cost of equity is the minimum rate of return provided by the company to

shareholders. Cost equity is given as compensation taken by investors to

invest capital into the company. Based on the investor perspective, the

expected return obtained by dividends, or added value from investment.

Expected returns, or equity costs, are related to the finances contained in the

funds they invest in the company's business activities (Investopedia, 2019).

In calculating the cost of equity there are two ways that can be done, namely

the Dividend Discount Model (DDM) and Capital Asset Pricing Model

(CAPM).

▪ The formula to calculate cost of equity using Dividend Discount

Model is as follow:

Value of Stock = 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

𝐶𝑜𝑠𝑡 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦−𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝐺𝑟𝑜𝑤𝑡ℎ 𝑅𝑎𝑡𝑒

Cost of Equity = 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 𝑥 1+𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝐺𝑟𝑜𝑤𝑡ℎ 𝑅𝑎𝑡𝑒

𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑆𝑡𝑜𝑐𝑘+𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝐺𝑟𝑜𝑤𝑡ℎ 𝑅𝑎𝑡𝑒

▪ The formula to calculate cost of equity using Capital Asset Pricing

Model (CAPM) is as follow:

ERi = Rf + βi (ERm – Rf)

Where:

ERi = Expected Return of investment

Rf = Risk-free rate

βi = Beta of the investment

ERm = Expected return of market

(ERm – Rf) = Market risk premium

c. Weighted Average Cost of Capital (WACC)

Reflects the expected average future cost of capital over the long run. Found

by weighing the cost of each specific type of capital by its proportion in the

firm’s capital structure (Gitman, 2015).

𝑊𝐴𝐶𝐶 = (𝑤𝑖 X 𝑟𝑖) + (𝑤𝑝 X 𝑟𝑝) + (𝑤𝑠 X 𝑟𝑟 𝑜𝑟 𝑛)

Where:

wi = Proportion of long-term debt in capital structure

wp = Proportion of preferred stock in capital structure

ws = Proportion of common stock equity in capital structure

Financial Feasibility Study

There are several indicators involved in the analysis of the feasibility study, as follows

(Gitman, 2015):

a. Net Present Value (NPV) of project is the sum of the present values of each of the

cash flows – positive as well as negative – that occurs over the life of projection.

If the calculated NPV of a project is negative (<0), the project is expected to recult

in a net loss for the company, it should not pursue the project, and vice versa.

b. Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the

profitability of potential investments. If the IRR is greater than the cost of capital,

accept the project, and vice versa.

https://www.investopedia.com/terms/c/capitalbudgeting.asp



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c. Payback Period (PBP) is the amount of time required for the firm to recover its

initial investment in a project, as calclated from cash inflows. If the payback

period is less than the maximum acceptable payback period, accept the peoject,

and vice versa.

Sensitivity Analysis

In sensitivity analysis, one input variable might be changed at a time and the effect

on the output variables (Net Present Value, Internal Rate of Return, and Payback Period)

are examined. Since the uncertainty cannot be neglected, it might consider a better

treatment on how a project’s value will change as the inputs change. The first way to do

is sensitivity analysis, where it might ask “what-if questions” about key variables and to

estimate how much “space” for error (Damodaran, 2015).

Scenario Analysis

In scenario analysis, the scenario may vary according to the base case, where

many inputs can have different values, and evaluate the projec’s value under these

scenarios. In general, scenario analysis can take best/worst case scenario or multiple

scenarios.

Results and Discussion

Analysis of Business Situation

For analyzing external situation, there are two techniques that are used: PESTEL

analysis and Porter's Five Forces analysis.

1. PESTEL analysis can be used to assess the strategic relevance of the six principal

components of the macro-environment:

a. Political: Government interference both material and non-material in the shoe

industry in Cibaduyut does not exist yet. There are several effects of policy

changes during the government tenure led by President Jokowi.

b. Economic: The increase in the rupiah exchange rate has an impact on this

company, because there are several raw materials and supporting materials for

production based on imports, so that production costs increase which requires

more capital. The emergence of competing goods from abroad and local.

Changes in people's taste for shoes that are very fast also greatly affect sales.

The perceptions about local brands began to increase among the people

c. Social: The age distributions of customer and workers affect the running of

the company’s business.

d. Technology: With this technological change impacting the business, a positive

impact is felt that is becoming more efficient.

e. Environment: The location of a shoe store in the production center has an

impact on smaller production costs and available markets.

f. Legal: there is a change in regulation regarding the payment of taxes for

Micro, Small, Medium Enterprise (MSMEs) from 1% to 0.5% but the payment

is paid based on omzet instead of profit. So the cost of paying taxes is more

expensive.

2. Porter’s Five Forces Analysis is use to determine the nature and strength of

competitive pressures in a given industry.

a. The threat of new entrants: The threat of new entrants in the world of fashion,

especially in the shoe industry business is high. To enter a business in the



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fashion sector does not need a lot of investments and not need advanced

technology.

b. The bargaining power of buyers: The strength of buyers in the high fashion

business. Switching costs incurred by buyers to move from one product to

another product is not too high, so it results in power of buyer high.

c. The bargaining power of suppliers: The large number of suppliers or craftsmen

make suppliers have low power of bargaining.

d. The threats of substitute product and service: Threats of substitute product in

this industry is high. In the footwear industry, especially shoes, there are many

substitute items available on the market, such as sandals and slippers, so that

the threat of substitution in the company becomes high.

e. Rivalry among Competitors in an Industry: Rivalry among competitors in this

industry is in high category. All players engaged in this industry are competing

to get as many consumers as possible by different marketing methods so they

can attract potential consumers.

Current Business Strategy

The strategy that will be explained is the strategy carried out by the company's

managerial function and how the company can meet and understand the needs and desires

of consumers and know how the company can survive in this industry.

a. Management Style and Human Resource

Business owners have a management style that is team management that is highly

concerned with people and tasks, it is characterized by the owner seeing directly

and controlling the work of employees and communicating directly with

employees regularly.

b. Marketing

The target market of the company are those who have a middle to lower economic

level. This pricing strategy is done by benchmarking, management section

meetings and management decision. The price set must be a competitive price not

too expensive but still of good quality. This as reflected by the previous study by

Budiman and Rahadi (2018).

c. Financial

To attract the potential customer and build a customer loyalty, the company has

set aside money for needs in the form of rewards given. The company's financial

condition has never suffered a loss from the start running business, even though

the company experienced a decrease in income earned.

d. Operation

Some of the processes carried out by the company in carrying out its business are

the process of making shoes to become products that can be sold, the process of

selecting craftsmen to become business partners for the next catalog, and the

process of selling products to consumers.

e. Physical Evidence and Service Facilities

This company already has three offline stores, so each brand has one store for

place of business and one place for producing goods. The company has good

facilities and services in each of its shops, unlike other stores in other cibaduyut

areas.



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Analysis of Business Solution

The analysis proposed solution for new product development, this step will

include of income schedule, income statement projection, and capital budgeting model

analysis. The financial projection of new product development will be prepared in IDR

because XYZ Group scope of work is for tenant in local region thus the currency used is

IDR. The non-financial aspects will be explained also.

1. Feasibility Analysis of Market and Marketing Aspects

a. New Market Segmentation

This new market segmentation is carried out because the middle class, which is

the largest group in Indonesia, is strongly influenced by the existing trends. So the

market for products that will be developed still has considerable market potential.

b. New Product Development:

▪ The new product to be developed is footwear products that use genuine leather

raw materials because so far the company has made shoes from imitation

leather because of the different market segmentation. This product

development is also supported by Mr. Taufik as a head of purchasing, he said

that actually wanted to have a product that is a characteristic of the company

to be better known by the wider community.

▪ For the selling price to be offered is like the XYZ Group principle in

implementing a pricing strategy, namely by benchmarking with the type of

shoes that are similar to the same target market.

2. Financial Projection

a. Project Description

The project that will be carried out by XYZ Group is to develop shoe products,

namely genuine leather shoes with new market segmentation. The product to be

made is in the form of genuine leather shoes with added characteristics and the

model of his shoes is also not much, actually almost the same as those that have

been made only this is made with leather that fits the market and given innovation.

b. Price and Market Size Description

To determine the price of the product, use benchmarking with local products that

sell similar products that are quite well known, so that the figure becomes a

benchmark for further development. The calculation for price projection is use

linear regression. The assumption of the quantity being sold is based on data on

the number of sales of leather shoes sold by the company, assuming the number

of buyers in the new market is the same. The calculation of projectin the market

size is using autoregression.



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Table 1. Market size and Price per Unit Projection

Year Market size Price per Unit (in IDR)

2019 27,438 821,680

2020 35,622 856,017

2021 18,543 890,354

2022 12,647 890,354

2023 37,462 959,028

2024 37,942 993,365

2025 4,322 993,365

2026 13,801 1,062,039

2027 56,297 1,096,376

2028 30,712 1,096,376

2029 18,908 1,096,376

Source: Author’s Analysis

c. Capital Expenditure:

Capital expenditures or CapEx, are funds used by companies to obtain, increase,

and maintain physical assets such as property, industrial buildings, or equipment.

▪ Investment in building is IDR 450,000,000 in the first five years, for the rent

of building. In the 5th year, the company do the re-investment in the amount

of IDR 565,358,120 for rent the building

▪ Investment in equipment is IDR 41,151,300 the equipment used is shoe molds,

set of machines, hammers, small shoe nails, handles, sewing machines, press

machines, chairs, wooden tables, grinding machines, ovens, and store fixtures.

▪ The intangible investment is IDR 2,000,000 this investment is in the form of

a patent. This patent is valid for two years, so every two years the company

needs to spend money to extend the copyright.

d. Operational Expenditure

Operational expenditures are costs for companies to run their business operations

every day, because operational costs are the largest part of the company's regular

costs.

▪ Direct material used for shoe making is Glue Pull, Glue Insoles, PC Glue, Box,

Wash Soles, Hangtag, Totebag, Shoelaces, Leather, Shoe Insoles, Fill

Sponges, Insole TA 2mm. Cost for direct material per unit is needed IDR

272,700.

▪ Sales Costs, G & A Costs, and R & D Costs, the percentage of which is

obtained from company data, the R & D costs for this project are costs incurred

in making product innovations and promotion activity.

e. WACC Calculation

WACC reflects the expected average future capital costs in the long term.

Calculations are based on assumptions and the results of previous calculations

related to long-term debt, preferred shares and ordinary shares. In addition,

calculations are also made related to the Calculation of Equity Costs. Calculation

of equity costs is done by the Dividend Discount Model method and C.

Table 2. Cost of Equity Calculation

Price per Share (BATA) 555,00

Dividend per Share (BATA) 8.71

Sustainable Growth Rate 9.04%

Cost of Equity 10.76%




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Figure 4. WACC Calculation Using DDM

(Source: Author’s Analysis)

Table 3. Cost of Equity Calculation Capital Asset Pricing Model

Project Debt to Equity Ratio 0.43

Levered Beta 0.30

Risk-Free Rate 7.30%

Market Return 6.55%

Cost of Equity 7.08%


Figure 5. WACC Calculation Using CAPM

(Source: Author’s Analysis)

The WACC calculation using DDM is 10.34%, while the result of the

calculation WACC using CAPM is 7.76% both of results are greater than the risk

free rate used in this calculation, which is 7.3%, it means that if investors invest

in this project will be more profitable when compared to investing in government

bond yields. In this research, WACC calculation is using DDM So, every project

carried out by XYZ Group requires a return of more than the WACC value of

10.34%, if not, then the company is better off investing in other projects.

f. Capital Budgeting Technique

The the main indicators to see the feasibility of project are Net Present Value

(NPV), Internal Rate of Return (IRR), Profitability Index (PI), Payback Period

(PBP). Table 4. Capital Budgeting Technique Result

Indicators Value Criteria

Payback Period 6.19 years <10 years

Net Present Value 9,285,737,996 > 0

Profitability Index 17.99 > 1

IRR 45.47% > WACC


Based on the table 4, it can be seen that the payback period occurs in year

6, the NPV value is positive, the profitability index is more than 1 and the IRR

is greater than WACC.

3. Sensitivity Analysis

Sensitivity analysis is an analysis to see which variables have a large influence on

changes in NPV. By looking at the results of Sensitivity Analysis, we can find out which

variables influence the change in value called NPV, whether it increases NPV or reduces

NPV. The following table is a calculation of sensitivity analysis by swinging 20% for

each variable of the base case.

WACC CALCULATION

Weight of Capital

Long-Term Debt 163.380.929,93

Preferred Stock -

Common Stock 383.222.169,83

Total 546.603.099,76

WACC Calculation Weight Cost Weighted Cost

Cost of Debt (After Tax) 30% 9,38% 2,80%

Cost of Preferred Stock 0,00% 0,00% 0,00%

Cost of Common Stock 70% 7,08% 4,96%

WACC 7,76%



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Table 5. Sensitivity Analysis


4. Scenario Analysis

Scenario analysis is the analysis carried out on NPV changes by making several

scenarios. In this case, the scenario to be made is three scenarios, including the worst,

base and best scenario. The variable is the largest percentage, meaning that the variable

is a factor that greatly affects the change in NPV value. Table 6. Scenario Analysis

Component Scenario 1

(Worst Case)

Scenario 2

(Base Case)

Scenario 3

(Best Case)

Inflation Rate 8.36% 4.67% 2.79%

Quantity Sold Realization 80% 100% 120%

Price per Unit Realization 77% 100% 134%

Direct Material 373,800 272,700 232,700

Long-term Debt Interest Rate 12.84% 12.5% 7%

NPV (5,057,608,019) 9,285,737,997 39,716,439,583


To mitigate the risk from the worst case scenario, several ways that a company

can do are as follows:

1. In order to mitigate the rising inflation rate, companies use hedging strategies with

suppliers.

2. In order to mitigate low quantity sold realization, use unique promotions to attract

potential customers to get expected target.

3. For the price per unit, the company must implement the right pricing strategy and

be able to create competitive prices so that it can compete with products in the

new market.

4. For direct material, the company cooperates with suppliers, especially for leather

raw materials to get the best price at best quality

5. For long-term debt interest rates, do the collaboration with banks that provide the

lowest interest rates in funding, so companies can enjoy more benefits.

Conclusions

▪ In order for the company to be expected to increase revenue, one of the strategies that

can be done by the company is to develop new products in new market segmentation.

The project that will be carried out this time is related to the development of footwear

products. This product development is carried out because the development of this

industry continues to grow along with the increasing demand for footwear. Therefore,

to deal with this condition, the project that will be carried out is the development of

leather shoe products with different market segments, namely those in the middle to

upper economy. This project is carried out so that the company can expand its market

so that it will benefit by taking the opportunity.



48

▪ Based on the feasibility study through financial projection using net present value

analysis method, internalh rate of return, and payback period; this project requires an

initial investment IDR 9,285,737,996. Based on the positive value of net present value

(NPV) the internal rate of return (IRR) greater than the weighted average cost of

capital (WACC) of and the investment payback period for 6.19 years, it can be

concluded that the project is financially feasible.

Table 7. Feasibility Study Results Indicators Value Criteria Result

Payback Period 6.19 years <10 years Acceptable

Net Present Value 9,285,737,996 > 0 Acceptable Profitability Index 17,99 > 1 Acceptable IRR 45.47% > WACC Acceptable


Recommendations

▪ Based on the analysis that has been done, if the company wants to carry out business

expansion projections, namely developing new products in new market segmentation,

there are recommendations for the company. The most important thing is to pay

attention to financial planning and capital structure in carrying out the project.

Because it will affect the use of capital both loans and equity by issuing shares can be

used correctly and efficiently. Furthermore, this is related to the payback period, the

company must be faster than six years, because if the company can get a faster return

period, it will be better. In addition, note also the factors that exist in sensitivity

analysis. There are five important variables, namely the number of inflation rates,

quantity sold realization, price per unit of realization, direct material, and long-term

deb interest rates that greatly affect the NPV of the company. Two variables that have

a great effect are quantity sold realization and price per unit of realization, to increase

sales, one of them is by increasing the target market and the right determination of

price per unit. There is a need to increase the target to be achieved so that the company

can get a higher NPV.

▪ In addition, in terms of getting the potential customer as much as possible, the

company should do the collaboration with public figures or influencers to be able to

increase the popularity of this new brand. This day, the existence of influencers in

promoting a product's brand has a positive impact on product fame and sales. In

addition, for the future, as has been done by other local branes by consigning with

The Good Dept Store, because this is quite helpful in increasing branding.



49

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Documents

FEASIBILITY STUDY FOR FOOTWEAR PRODUCT DEVELOPMENT … · 2019. 9. 5. · Abstract: Footwear industry continues to grow in line with increasing demand. One of well-known local brand