Investment Analysis of New Fire Truck: A Case Study of Purchase or Rent Option

PKT, as a petrochemical company with high potential hazards, prioritizes emergency preparedness and response by complying with regulations and standards. In addition to serving its own needs, PKT’s fire and rescue department also provides emergency services to four neighboring companies through an annual fee cooperation scheme. To enhance the emergency response services, PKT conducted an evaluation and identified the need for an additional fire truck unit with up-to-date technology. To determine the most suitable option, PKT is considering purchasing or renting the new fire truck units. A financial modeling analysis was conducted using income from health and safety services. The financial feasibility analysis, considering parameters such as NPV, IRR, and discounted payback period, resulted in a feasible outcome. The Purchase option exhibited better economic value, with a predicted NPV of Rp. 569,276,495, an IRR of 11.56% (higher than the discount rate of 10.5%), and a discounted payback period of 9.35 years. Sensitivity analysis, using tornado and spider charts, revealed that the annual fee from clients or joint venture companies had the most significant impact on the project’s financial performance, followed by manpower costs. A 20% increase in annual fees led to a significant increase in NPV Rp. 6,639,013,466, while a 20% decrease resulted in a significant decrease in NPV (−Rp. 5,500,460,477). Similarly, a 20% increase in manpower costs resulted in a decreased NPV of Rp. −3,500,609,667. Based on the sensitivity analysis, the two significant factors influencing the purchase option were identified as the annual fee and manpower cost. Recommendations that are also put forward for this study are identification to anticipate increases in labor costs and to keep manpower costs under control. The increase in manpower costs must be accompanied by an increase in income. Exploring opportunities to attract additional clients, particularly companies in the industrial complex that do not yet have an agreement with PKT, is also advised. By implementing these recommendations and ensuring cost control, PKT can optimize its emergency response services and maintain a financially viable operation.

Introduction

As a petrochemical company with a major hazard process safety risk such as fire, explosion and toxic release, PKT has a company safety and health policy including the implementation of the process safety management (PSM). PKT is committed to carrying out all business process activities by always prioritizing safety and health through the implementation of a sustainable safety and health management system.

As a petrochemical company, PKT has facilities and infrastructure that fulfil the emergency preparedness and response clauses in accordance with these regulations (Indonesian Government, 2012) and standards (National Fire Protection Association-NFPA, 2022) such as PKT has fire truck, water tender, ambulance, fire & rescue commander car facilities, certified fire man fire & rescue training gallery and fire water system including fire tank, pipeline and fire pump. Currently, PKT has 9 fleets of fire trucks with an average usage period of more than 20 years (Manitoba Office of the Fire Commissioner, 2022). For this reason, in an effort to improve health and safety services at PKT and other clients in the area, PKT plans to add one of the new fire truck units whose technology is more up to date.

To realize this, PKT has 2 alternative solutions in providing new fire truck units, The option is purchase or rent. The scheme to be used is to utilize income from health and safety services, so it is necessary to do financial modelling to determine which option is most suitable for these conditions.

Research Objectives

There are several objectives of this research: To find out the optimal cost between purchase or rent alternative scenarios to provide a new unit aerial fire truck in 10-year projection, To find out the net cash flow on each option for 10-year projection, Select the alternative option to provide new aerial fire truck by financial feasibility (NPV, IRR, discounted payback period).

The research framework adopted in the present study is shown in Fig. 2.

Literature Review

Discounted Cash Flow (DCF)

DCF is a valuation technique that estimates an investment opportunity’s attractiveness by projecting future cash flow and discounting them (most frequently using weighted average cost of capital) to arrive at a present value that used to evaluate the investment opportunity (Garrison, 2012).

Discounted cash flow formula is: (1)DCF=CF1(1+r)1+CF2(1+r)2+…CFn(1+r)n

where:

CF1 = The cash flow for year one;

CF2 = The cash flow for year two;

CFn = The cash flow for additional years;

r = The discount rate.

Operating Cost Sharing

Operational costs for fire and rescue activities are covered by PKT and several client/companies with the following details in Fig. 1.

Fig. 1. Operating cost sharing percentages. Source: PKT (2022).

Fig. 2. The research framework.

Investment Decision Analysis

Investment decision analysis is the process of assessing and analyzing investment possibilities in order to allocate financial resources in a well-informed manner. It entails evaluating several investment possibilities, taking into account their possible risks and rewards, and choosing the best investment projects.

Net Present Value (NPV)

NPV is a method that takes into account the time value of money and helps assess the profitability and viability of an investment project. This project explores the concept of NPV, its calculation, and its significance in decision-making processes. To calculate NPV, one needs to estimate the expected cash flows associated with the investment project over its projected life and discounted them back to the present using an appropriate discount rate: (2)NPV=CF1(1+r)1+CF2(1+r)2+…CFn(1+r)n−Initial investment

Internal Rate of Return (IRR)

The internal rate of return (IRR) is a financial metric used to evaluate the profitability of an investment project. The IRR is often considered an essential tool in investment analysis as it helps determine the potential return on an investment and assess its viability. It measures the percentage rate of return that an investment is expected to generate over its projected life. If the IRR is greater than the required rate of return or the cost of capital, the investment is considered financially viable and potentially profitable. On the other hand, if the IRR is lower than the required rate of return, the investment may not generate sufficient returns to cover the cost of capital, indicating a potential loss.

Discounted Payback Period

According to Gitman and Zutter (2012), the payback period is a metric used to calculate the duration required for a company to recover its initial investment in a project through cash inflows. The discounted payback period incorporates discounting to accurately determine when the project’s cash inflows will match or exceed the initial investment on a present value basis. This approach provides a more sophisticated and financially prudent measure for evaluating the break-even time and recovering the initial investment.

Sensitivity Analysis

Sensitivity analysis is a technique used in financial modelling and decision-making to assess the impact of changes in input variables on the output or outcome of a model. It helps evaluate the sensitivity or responsiveness of a model’s results to different scenarios or variations in the input assumptions. By conducting sensitivity analysis, decision-makers can gain insights into the robustness and reliability of their decisions in the face of different circumstances or uncertainties (Jovanović, 1999).

Research Methodology

This research uses primary data and secondary data. Primary data obtained by interview with several experts and management at PKT are appropriate to the contextual problem. Secondary data were collected from several source such as reports, books, journals, articles, and websites. Moreover, the author also gets secondary data from the company annual and financial report. Both data primary and secondary data consist of quantitative and qualitative information. The buying-renting decision involves application of the financial feasibility, it will be determined whether it is financially feasible or not and to find which alternative has better financial model by NPV, IRR and discounted payback period.

Data Analysis

Financial Analysis Assumption

To calculate the required investment value, data is needed to support calculations in finding the Net Present Value (NPV), Internal Rate of Return (IRR) and Discounted Payback Period. The data can be seen in Table I.

Table I. Financial Analysis Assumption

No	Description	Value	Source
1	Initial investment	Rp. 9,238,900,000	Company’s data
2	Annual rent cost	Rp. 1,310,445,162	Company’s data
3	Revenue and operating cost	Calculated	Company’s data
4	Inflation rate avg	4.38%	Calculated from Bank Indonesia - OJK 2023 Last 17th Months
5	Project duration	10 Years	Company’s data, with assumption
6	Cost and sales	Following inflation rate	Company’s data and process data.
7	WACC	10.5%	Company’s data
8	Tax Rate	22%	Company’s data
9	Manpower merit Performance/Year (avg)	4.38%	Company’s data & Inflation
10	Depreciation period	10 Year	Company’s data
11	Salvage value end period	40%	Company’s data

Capital Expenditure (CAPEX)

Capital expenditure in this project will describe in 2 options, Purchase or Rent. Total investment of purchase New Fire Truck in PKT is Rp. 9,238,900,000 (see Table II).

Table II. Project Capital Expenditure Purchase

No.	New aerial fire truck purchase	Value (Rp)
1.	Unit price	8,120,000,000
2.	Mobilization	100,000,000
3.	Rotary lamp	10,000,000
4.	Communication installation	12,000,000
5.	Foam installation	22,000,000
6.	Training	135,000,000
7.	Total	8,399,000,000
8.	PPN 10%	839,900,000
	Installed cost of new asset	9,238,900,000

For Rent option, Total initial investment is Rp. 1,699,989,678. The breakdown cost for this Rent Option can be seen in Table III.

Table III. Project Capital Expenditure Purchase Option

No.	New aerial fire truck purchase	Value (Rp)
1.	Capital cost (rent)/year -1	1,310,445,162
2.	Mobilization	100,000,000
3.	Rotary lamp	–
4.	Communication installation	–
5.	Foam installation	–
6.	Training	135,000,000
7.	Total	1,545,445,162
8.	PPN 10%	154,544,516
	Installed cost of new rent asset	1,699,989,678

Depreciation of Assets

The depreciation for this New Aerial Fire Truck Project will be using straight line depreciation method for 10 years of estimate economic life (see Table IV). Refers to the company historical data. Salvage value for 10 years useful is 40% from cost of new asset, salvage value will be Rp. 3,695,000,000.

Table IV. Depreciation Table

Period	Year	Book value (Rp)	Depreciation expense (Rp)	Accumulateddepreciation (Rp)
0	2023	9,238,900,000
1	2024	8,684,566,000	554,334,000	554,334,000
2	2025	8,130,232,000	554,334,000	1,108,668,000
3	2026	7,575,898,000	554,334,000	1,663,002,000
4	2027	7,021,564,000	554,334,000	2,217,336,000
5	2028	6,467,230,000	554,334,000	2,771,670,000
6	2029	5,912,896,000	554,334,000	3,326,004,000
7	2030	5,358,562,000	554,334,000	3,880,338,000
8	2031	4,804,228,000	554,334,000	4,434,672,000
9	2032	4,249,894,000	554,334,000	4,989,006,000
10	2033	3,695,560,000	554,334,000	5,543,340,000

Operation Expenditure (OPEX)

There are 2 options in calculating Operation Expenditure (OPEX) for the New Aerial Fire Truck Project: Purchase (Table V) or Rent (Table VI).

Table V. Cost of Operating Purchase Option (in Rp)

Panel A: New fire truck years 1–5
Operating cost	1	2	3	4	5
New fire truck	8,500,000	8,872,300	9,260,907	9,666,534	10,089,929
Maintenance cost	87,845,660	82,302,320	76,758,980	71,215,640	65,672,300
Insurance all risk	47,943,500	48,943,900	49,965,174	51,007,759	52,072,098
Fuel new FT	15,000,000	15,657,000	16,342,777	17,058,590	17,805,756
Consumable good	554,334,000	554,334,000	554,334,000	554,334,000	554,334,000
Depreciation new FT	713,623,160	710,109,520	706,661,837	703,282,523	699,974,083
Total operating cost of new FT	8,500,000	8,872,300	9,260,907	9,666,534	10,089,929
Salary and wages	7,096,712,696	7,407,548,712	7,731,999,346	8,070,660,917	8,424,155,865
Vehicle rent	58,000,000	58,000,000	58,000,000	58,000,000	68,161,600
Fuel	201,742,453	205,979,045	210,304,604	214,721,001	219,230,142
Maintenance	1,283,874,000	1,340,107,681	1,398,804,398	1,460,072,030	1,524,023,185
Fire water supply	234,855,000	245,141,649	255,878,853	267,086,347	278,784,729
Depreciation existing assumed for 5 years	237,078,000	237,078,000	237,078,000	237,078,000	–
Existing operating cost	9,112,262,149	9,493,855,087	9,892,065,201	10,307,618,295	10,514,355,522
Sharing 50% operating cost	4,556,131,075	4,746,927,543	4,946,032,600	5,153,809,148	5,257,177,761
Total sharing existing operation cost + new fire truck operating cost	5,269,754,235	5,457,037,063	5,652,694,438	5,857,091,671	5,957,151,844
Panel B: New fire truck years 6–10
Operating cost	6	7	8	9	10
New fire truck	10,531,868	10,993,163	11,474,664	11,977,254	12,501,858
Maintenance cost	60,128,960	54,585,620	49,042,280	43,498,940	–
Insurance all risk	53,158,646	54,267,866	55,400,231	56,556,225	57,736,340
Fuel new FT	18,585,649	19,399,700	20,249,407	21,136,331	22,062,102
Consumable good	554,334,000	554,334,000	554,334,000	554,334,000
Depreciation new FT	696,739,122	693,580,349	690,500,582	687,502,750	92,300,300
Total operating cost of new FT	10,531,868	10,993,163	11,474,664	11,977,254	12,501,858
Salary and wages	8,793,133,892	9,178,273,157	9,580,281,521	9,999,897,851	10,437,893,377
Vehicle rent	68,161,600	68,161,600	68,161,600	68,161,600	68,161,600
Fuel	223,833,975	228,534,489	233,333,713	238,233,721	243,236,629
Maintenance	1,590,775,401	1,660,451,363	1,733,179,133	1,809,092,379	1,888,330,625
Fire water supply	290,995,500	303,741,103	317,044,963	330,931,533	345,426,334
Depreciation existing assumed for 5 years	–	–	–	–	–
Existing operating cost	10,966,900,368	11,439,161,711	11,932,000,930	12,446,317,084	12,983,048,565
Sharing 50% operating cost	5,483,450,184	5,719,580,856	5,966,000,465	6,223,158,542	6,491,524,283
Total sharing existing operation cost + new fire truck operating cost	6,180,189,306	6,413,161,205	6,656,501,047	6,910,661,292	6,583,824,582

Table VI. Cost of Operating Rent Option (in Rp)

Panel A: Rent fire truck years 1–5
Operating cost	1	2	3	4	5
Rent FT
Biaya sewa	1,310,445,162	1,310,445,162	1,310,445,162	1,310,445,162	1,310,445,162
Maintenance cost	–	–	–	–	–
Insurance	–	–	–	–	–
Fuel new FT	47,943,500	48,943,900	49,965,174	51,007,759	52,072,098
Consumable good	15,000,000	15,657,000	16,342,777	17,058,590	17,805,756
Depreciation FT	–	–	–	–	–
Salary and wages	7,096,712,696	7,407,548,712	7,731,999,346	8,070,660,917	8,424,155,865
Vehicle rent	58,000,000	58,000,000	58,000,000	58,000,000	68,161,600
Fuel	201,742,453	205,979,045	210,304,604	214,721,001	219,230,142
Maintenance	1,283,874,000	1,340,107,681	1,398,804,398	1,460,072,030	1,524,023,185
Fire water supply	234,855,000	245,141,649	255,878,853	267,086,347	278,784,729
Depreciation existing
Assumed for 5 years	237,078,000	237,078,000	237,078,000	237,078,000	–
Existing
Operating Cost	10,966,900,368	11,439,161,711	11,932,000,930	12,446,317,084	12,983,048,565
Sharing 50% operating cost	4,556,131,075	4,746,927,543	4,946,032,600	5,153,809,148	5,257,177,761
Panel B: Rent fire truck years 6–10
Operating cost	6	7	8	9	10
Rent FT
Biaya sewa	1,310,445,162	1,310,445,162	1,310,445,162	1,310,445,162	1,310,445,162
Maintenance cost	–	–	–	–	–
Insurance	–	–	–	–	–
Fuel new FT	52,072,098	53,158,646	54,267,866	55,400,231	56,556,225
Consumable good	17,805,756	18,585,649	19,399,700	20,249,407	21,136,331
Depreciation FT	–	–	–	–	–
Salary and wages	8,793,133,892	9,178,273,157	9,580,281,521	9,999,897,851	10,437,893,377
Vehicle rent	68,161,600	68,161,600	68,161,600	68,161,600	68,161,600
Fuel	223,833,975	228,534,489	233,333,713	238,233,721	243,236,629
Maintenance	1,590,775,401	1,660,451,363	1,733,179,133	1,809,092,379	1,888,330,625
Fire water supply	290,995,500	303,741,103	317,044,963	330,931,533	345,426,334
Depreciation existing
Assumed for 5 years	–	–	–	–	–
Existing operating cost	10,966,900,368	11,439,161,711	11,932,000,930	12,446,317,084	12,983,048,565
Sharing 50% operating cost	5,483,450,184	5,719,580,856	5,966,000,465	6,223,158,542	6,491,524,283

Projected Revenue Calculation

Financial Projection

The next is to find out the discounted cash flow that projected for the next 10 years (see Tables VII, VIII, IX). After these calculations are carried out and then Net Present Value (NPV), Internal Rate Return (IRR) and Discounted Payback Period values are calculated using a discount rate of 10.5%. Figs. 3 and 4 show that for 9 years, cumulative cash flow is still in the mines position and has been positive after the 9^th year.

Table VII. Annual Fee of Emergency Response 10 Years Projection (in Rp)

Year	Client				Total
	PT. KNI	PT. KMI	PT. KDM	PT. KPI
	1,587,732,000	1,106,815,000	382,815,000	1,321,300,000	4,398,662,000
1	1,704,906,622	1,188,497,947	411,066,747	1,418,811,940	4,723,283,256
2	1,830,728,730	1,276,209,095	441,403,473	1,523,520,261	5,071,861,560
3	1,965,836,511	1,370,393,327	473,979,049	1,635,956,056	5,446,164,943
4	2,110,915,245	1,471,528,354	508,958,703	1,756,689,613	5,848,091,916
5	2,266,700,790	1,580,127,147	546,519,855	1,886,333,307	6,279,681,099
6	2,433,983,308	1,696,740,530	586,853,021	2,025,544,705	6,743,121,564
7	2,613,611,277	1,821,959,981	630,162,774	2,175,029,904	7,240,763,936
8	2,806,495,789	1,956,420,628	676,668,786	2,335,547,111	7,775,132,314
9	3,013,615,178	2,100,804,470	726,606,943	2,507,910,488	8,348,937,079
10	3,236,019,978	2,255,843,840	780,230,535	2,692,994,282	8,965,088,635

Table VIII. Cargo Emergency Standby 10 Years Projection (in Rp)

Year	Frequency	Unit price	Cash in
	35x	11,200,000	392,000,000
1	35x	12,026,560	420,929,600
2	35x	12,914,120	451,994,204
3	35x	13,867,182	485,351,377
4	35x	14,890,580	521,170,308
5	35x	15,989,505	559,632,677
6	35x	17,169,531	600,933,569
7	35x	18,436,642	645,282,466
8	35x	19,797,266	692,904,312
9	35x	21,258,304	744,040,650
10	35x	22,827,167	798,950,850

Table IX. Training Fire and Rescue Services 10 Years Projection

	Frequency	Unit price	Cash in
	6x	15,000,000	90,000,000
1	6x	16,107,000	96,642,000
2	6x	17,295,697	103,774,180
3	6x	18,572,119	111,432,714
4	6x	19,942,741	119,656,448
5	6x	21,414,516	128,487,094
6	6x	22,994,907	137,969,442
7	6x	24,691,931	148,151,587
8	6x	26,514,196	159,085,174
9	6x	28,470,943	170,825,660
10	6x	30,572,099	183,432,593

Fig. 3. Net cash flow chart: Purchase option.

Fig. 4. Net cash flow chart (discounted): Purchase option.

Figs. 5 and 6 explain that the net cash flow in the first 3 years is still minus, and then in the 4^th year it starts to be positive, slowly bringing the accumulated cash flow (discounted) to be positive after the 9^th year.

Fig. 5. Net cash flow chart: Rent option.

Fig. 6. Net cash flow chart (Discounted): Rent option.

Financial Feasibility Analysis

Table X presents a comparison of the financial analysis between the Purchase and Rent options.

Table X. Comparison Table Purchase vs. Rent

Financial parameter	Purchase	Rent
NPV	Rp. 569,276,495	Rp. 126,010,854
IRR	11.56%	11.27%
Discount rate PKT	10.50%	10.50%
Discounted payback period	9.35	9.27

Based on the analysis above, the financial parameter comparison shown that Purchase option predicted have better economic value than Rent option. So, Purchase is the selected option for the provision of New Aerial fire truck. This research conducts sensitivity analysis to determine the impact of significant changes in variables on financial feasibility parameters.

Sensitivity Analysis

The sensitivity analysis will perform to testing which variable that have a significant impact to NPV performance.

Sensitivity analysis by tornado chart (Fig. 7) shows that annual fee of client or joint venture company is the most delicate variable influencing the project’s financial performance, then followed by manpower cost.

Fig. 7. Sensitivity analysis: Purchase option.

The other chart, Fig. 8, is a spider chart with X axis as NPV value and Y axis as scenario input value. It has axis in the centre of chart, also shows the same perspective, the top variables that can influence the NPV performance are annual fee and manpower cost.

Fig. 8. Spider chart: Purchase option.

Conclusions and Recommendations

Conclusions

1. Based on financial analysis result above, show that NPV and IRR of Purchase option is greater than Rent Option. NPV obtained Rp. 569,276,495 and Internal Rate of Return (IRR) has 11.56% still better than the WACC set by the company of 10.5%. So, Purchase is the selected option for the provision of New Aerial fire truck.
2. According to the Sensitivity analysis by tornado chart and spider chart shown that Annual fee of client or joint venture company is the most delicate variable influencing the project’s financial performance. If the Annual fee has increased from each client by 20%, so the NPV has Increased significant to Rp. 6,639,013,466. and the other way if the annual fee has decrease by 20%. The NPV has decrease significant NPV to −Rp. 5,500,460,477.

Recommendations

Based on the sensitivity analysis using the tornado chart (Fig. 7) and spider chart (Fig. 8), the two significant factors influencing the selected purchase option are the annual fee and manpower cost. Therefore, it is advisable to take necessary actions or further examination regarding these aspects:

1. Identification to anticipate increases in manpower costs and keep manpower costs under control. The increase in manpower costs must be accompanied by an increase in income.
2. Looking for opportunities to add clients, especially companies in the industrial complex that do not yet have MoU with PKT.
3. Maintain and carry out proper maintenance of the assets that are owned and always improve the competence of the fireman so that client trust is maintained.