W25_TRI_ Options of Investment on Poultry Farming

1.      Problem recognition, definition and evaluation

The economics of poultry farming thru either building new farming or acquiring existing farming has shown that investment in this kind of farming model is very prospective business. However, setting up a new farm or acquiring an existing farm doesn’t include the risk in the analysis. Therefore, the risk and sensitivity analysis shall be conducted to balance the benefit of each type of farming model.

2.      Development of the feasible alternative

Decision tree is a powerful tool used by industry practices to resolve issues in business decision analysis about how to value the risk of a proposed project.  The value generated from economic model of a scenario will be adjusted with certain percentage as a risk factor which reflects risks involved in respective scenario compared to other scenarios. Total percentage of all scenarios must be 1.

In this case, there are 4 scenarios of poultry farming;

1.       Setting up new white poultry

2.       Setting up new red poultry

3.       Acquiring existing white poultry

4.       Acquiring existing red poultry

3.      Development of the outcome

The summary of economic indicators as follows;

Table 1. Economic Indicator of Farming Scenario

No	Scenario	IRR (%)	NPV (K Rp)	Remarks
1	Setting up new white poultry	56.9	137,332	Lifetime 10 years
2	Setting up new red poultry	49.3	96,104	Lifetime 10 years
3	Acquiring existing white poultry	48.0	104,071	Acq in Year 3, Lifetime up to Year 10
4	Acquiring existing red poultry	34.4	57,997

                             

Risk factor put in those scenarios is based on the NPV’s value of new or existing scenario. The risk factor of new scenario is 0.45 since that scenario has higher risk than existing scenario, thus the risk factor of existing scenario is 0.55. Furthermore, risk factor of scenario 1, 2, 3 and 4 is 0.2, 0.25, 0.25, and 0.3 respectively.

Decision tree is built based on risk factor and NPV of each scenario, thus the risk-adjusted NPV is calculated as shown in Figure 1.

Figure 1. Decision Tree of Farming

4.      Selection of criteria

From Figure 1, scenario 1 (Setting up new white Poultry) is the highest risk-adjusted NPV over the others. Acquiring existing white poultry (scenario 3) is also a favorable decision, since its risk-adjusted NPV is only a bit lower than scenario 1, but a significantly lower risk than scenario 1.

5.      Analysis

The sensitivity analysis is conducted to look the impacts of certain variable to economic indicator. In this case, the acquisition price is used as variable in sensitivity analysis since the acquisition price is seen as main factor particularly in decision tree model.

The current acquisition price is Rp 100 million. The sensitivity analysis will provide risk-adjusted NPV using some acquisition prices as shown in Table below.

Acq Price (K Rp)	80,000	90,000	100,000	110,000	120,000
Acq white poultry	30,365	28,191	26,018	23,844	21,671
Acq red poultry	22,616	20,007	17,399	14,791	12,183

 

6.      Selection of alternative

Based on sensitivity analysis above, the investor shall be select maximum acquisition price at Rp 100 million to keep the economic favorable. In addition, every 10 million additional of acquisition price impact to risk-adjusted NPV that might make acquiring existing poultry farm is not favorable anymore compared to building new poultry farm.

7.      Performance monitoring and post-evaluation of results

In conclusion, the decision tree showed that the relative risk involved in each scenario has been taken into account. Setting up new white poultry which had highest NPV has the highest risk-adjusted NPV too. However, acquiring existing white poultry with price maximum Rp 100 million is the most favorable option for the investor since the adjusted-NPV is still high, and the risk is quite low. A combination of new and acquired farm could be taken to balance the portfolio of poultry farm.

 

References:

·         Asmoro, Trian H. (2012, Dec 21). Investment on Poultry Farming. Retrieved from: http://aacemahakam.blogspot.com/2012/12/w23tri-investment-on-poultry-farming.html

·         Asmoro, Trian H. (2012, Dec 21). Acquisition of Poultry Farming. Retrieved from: http://aacemahakam.blogspot.com/2012/12/w24tri-acquisition-of-existing-poultry.html

·         Kent, Webb G. Risk. (2012, Sep 27). Adjustment for Decision Analysis: Decision Trees, NPV, And The Capital Asset Pricing Model. San Jose State University