#TITLE_ALTERNATIVE#

• Main Author: ANGGRAENI PARAMEISWARI (NIM 19005030), RATRI
• Format: Final Project
• Language: Indonesia
• Online Access: https://digilib.itb.ac.id/gdl/view/11220
• Institution: Institut Teknologi Bandung

As a state owned company (BUMN) that has the strongest and widest distribution channel in Indonesia, PT. XYZ with its group member of PT. ABC and PT. DEF, be able to become role model for other BUMN in term of company investment policy particularly about long or short term decision taking. The decision to invest is highly influenced by many of financial and non financial considerations. From a financial point a view, the considerations are the company ability in funding the investment, financial risk, rate of return, and so on. On the other hand, from non financial side, it can be considered from technical and technology risk, human resources, legal risk, and market risk. Thus, the company has to be serious in deciding what kind of investment that it should undertake, so the requirements in company investment policy to release any investment initiatives become one of main factors in measuring investment success.<p> <br /> <br /> <br /> <br /> The research objective is to know whether the company investment policy in terms of significant investment decision taking, is based on Investment Opportunities Schedule (IOS). The IOS will be only related to the Weighted Average Cost of Capital (WACC), not with Weighted Marginal Cost of Capital (WMCC) because this research only wants to see the IOS implementation in term of IRR and WACC, but not associated with the new fund resources as used in WMCC. Then, the research continue to know about the level of influence between investment and the stock price, as an index to show the increase or decrease level of shareholder value. It consists of correlation calculation not only between Internal Rate of Return (IRR) and the stock price, but also Net Present Value (NPV) and the stock price.<p> <br /> <br /> Based on the calculation and review of company investment analysis, PT. XYZ, has already implemented the IOS theory as basic knowledge to compile the requirement of investment submission, especially in strategic and operational improvement investment taken in 2003-2007. The IOS theory mentions that the chosen investment has higher IRR. Higher IRR means a larger difference with the WACC. It also indicates that the chosen investment has a higher NPV. This condition is also supported by the fact that there is value added for shareholder as an impact of the IOS implementation. The indicator for shareholder value added is the positive change in market stock price. This research indicates that the positive change in market stock price exists. Therefore because there is value added to the shareholder, there is a relationship between investment and stock price.<p> <br /> <br /> The correlation index reflects that investment (NPV) and stock price change has a positive linear correlation. The positive linear correlation shows that as the NPV increase is followed by the increase level in stock price change. It can be concluded that not only the investment issue will have an effect on stock price, but that the investment must have a positive NPV in order to have an influence on stock price. The higher the NPV, the higher level of stock price change increase. On the contrary, the measurement of correlation between IRR and stock price change indicates a negative linear correlation. In other words, as the IRR increase; it is not followed by an increase in stock price.<p> <br /> <br /> Therefore NPV is more representative compared to IRR in terms of an investment decision; it reflects all aspect of an investment decision, such as WACC and cash flow. Conversely, IRR only consists of cash flow and the rate of return that will result in the present value of the cash flow to equal to zero. The internal rate of return does not reflect the market rate of return, which is the return that will maximize firm value, whereas WACC does. WACC reflects the rate of return required by the market, in other words, it is the return that will increase firm value. Another conclusion is from investor point a view. Based on the linear correlation calculation, it is proved that in order to consider the alternative investment, investors are likely to use NPV than IRR. The reason is because, again, NPV reflects both WACC and cash flow. Furthermore, NPV is presented in currency which easier and more adaptable for investors to figure out between investment alternatives.<p> <br /> <br /> After knowing that investor more prefer NPV in their investment considerations compared to IRR, it is better for the company to maintain the investment's NPV in a stable or even in improved level after a project is completed in order to attract many investors. Therefore, company should also make sure that the investment announcement is held in proper time and event to avoid hesitancy from investors due to national and political situation.